As your startup grows, you become more aware of the legal restrictions that are putting pressure on your bottom line. No doubt, even entrepreneurs have to play by the rules in order to continue doing business. This would lead them into choosing ownership between a sole proprietorship status and a limited liabilities company or LLC status.
From the looks of it, converting your business into an LLC is more practical than to consider it a sole proprietorship. To begin with, you are provided with greater tax flexibility with an LLC since they are not subjected to federal income tax. But perhaps the best advantage LLCs have is the protection it grants to owners. Of the business goes bankrupt, for instance, banks won’t go after your personal assets as payment for the debts of the business.
If you’re planning to convert your small business into an LLC, you will have to go through a simple set of steps.
- Prepare your articles of organization
The articles of organization contain the name of the LLC, its full address, as well as other ownership details such as the names of the owners, the effectivity date, and organizational statutes. It’s advisable that you secure a document template from your state so you don’t leave out any important details as per your state’s requirements.
- Hire a resident agent
Of course, before you submit your articles of organization for filing, you will need to designate an individual or third-party business to receive documents on your behalf. When it comes to receiving service of process or SOP documents and notifying you of any court-sanctioned summons or orders, getting a reliable resident or registered agent is of the utmost importance. For this, opt for a registered agent that’s highly responsive so you won’t waste time or miss due dates that could cost you dearly.
- Register for new licenses
Since LLCs are separate legal entities, it’s important that you update your local and federal licenses stating your current setup. In most cases you will be asked to register for new licenses in order to continue operating. Lastly, you should also update your status with the IRS. This might take some time, but if you are able to accomplish these sooner, then it will be smooth sailing from here on out.
- Draft an operating agreement
Of course, any business organization has its own bylaws that outline the specifics of managing the business. This document should include a set of rules that list the rights of your shareholders and show how the shareholders are organized.
- Create a bank account
You may want to keep better track of your LLC’s finances, so it’s important that you create a separate bank account. That way you won’t have to wonder where all your capital went and how much taxes you owe. Once done, you can proceed to publish a notice announcing the creation of an LLC.
Small businesses can benefit from having LLC ownership in a lot of ways. With these tips in mind, you will be able to operate your business within legal bounds.