LLC sole proprietorship – grow your business while limiting your personal financial exposure. An easy way to start a business, with low overhead, and minimal legal requirements, the sole proprietorship is one of the best ways to put your business plan into action. But when the wrong circumstances hit, the strengths of your sole proprietorship may rapidly turn into gaping holes that lead to personal wipe-out. The sole proprietorship LLC structure is the answer.
An LLC proprietorship is like adding a wall and a moat to your sole proprietorship castle. Below, you’ll learn how to go from sole proprietorship to LLC, the difference between sole proprietorship and LLC, how can an LLC be a sole proprietorship, and whether to choose a sole proprietorship or LLC for small business.
Before going any further, if you’re just starting out on your sole proprietorship adventure, a quick overview of sole proprietorship formation may help you in your planning. Also, the Sole Proprietorship Cheat Sheet and Formation Checklist is a good desktop reference. Those resources will help you solidify the benefits of the LLC sole proprietorship.
What is a Sole Proprietorship LLC?
A sole proprietorship LLC is a sole proprietorship structure that combines the key advantages of a sole proprietorship – flexibility, pass through tax treatment, limited legal formalities – with corporate-style limited liability.
In a sole proprietorship, the sole proprietor owner owns all of the assets of the business in his/her own name, and is directly responsible for all sole proprietorship liabilities. The traditional sole proprietorship, the village butcher, baker or candlestick maker, reaped the full benefits of the traditional sole proprietorship structure because he/she knew all of the customers. The traditional sole proprietor could use this knowledge of customers, their ups and downs, etc., to make good decisions and avoid undue risk. The small village environment, everyone knowing everyone else, also provided and extra layer of protection. But for you, the world has changed, and the single member LLC sole proprietorship is how you change with it.
The new sole proprietorship structure, the LLC for sole proprietorship, takes your traditional sole proprietorship and wraps it in a single member limited liability company (LLC) to create your sole proprietorship LLC.
Many sole proprietors don’t understand that their sole proprietorship, which may be a second or third income, could end up destroying their financial safety net, throwing them into bankruptcy. If you’re serious about protecting yourself while growing your business, download “What the Other 5% do to Sleep Easy at Night.” This report gives you specifics about how the sole proprietorship LLC addresses key sole proprietorship risks. It gives you an overview of the tax scenario, including how the sole proprietorship LLC stacks up against the C corp and the S corp. And the report gives you a low-cost, easy way to get your sole proprietorship LLC started today.
Sole Proprietorship to LLC
Can a sole proprietorship become an LLC? The answer is, “Yes!” Going from sole proprietorship to LLC is one of the most painless business transformations. Your sole proprietorship and the basic form of limited liability company (LLC) have something in common – pass-through tax treatment. Pass-through taxation means that profits earned at the entity level (sole proprietorship or LLC) are only taxed at the owner level (you the sole proprietor). Because of this similarity, switching from sole proprietorship to LLC can usually be done tax-free.
To transfer your sole proprietorship to LLC there are three steps: (i) form your sole proprietorship LLC; (ii) have your sole proprietorship make an agreement transferring all of its assets and liabilities to your new LLC sole proprietorship; (iii) have your sole proprietorship LLC agree to assume all of the assets and liabilities of your sole proprietorship. That’s how to go from sole proprietorship to LLC in a nutshell.
Besides the basics, other issues may come up when you convert your sole proprietorship to LLC. One issue is how to turn a sole proprietorship into an LLC and preserve continuity. Depending on your situation, your new sole proprietorship LLC may be seen as being a continuation of your sole proprietorship. This is helpful because things such as your office lease or equipment lease may be undisturbed by the change.
Of course, switching from sole proprietorship to LLC will include a transition period. Your transition could be as simple as making sure documents, accounts, etc. convert from “J’s Sole Proprietorship” to using “J’s Sole Proprietorship LLC.” But it may be more complicated. Call (646 435 0668) to discuss this issue in detail.
However, if you’re just starting out, you should be able to jump directly to the sole proprietorship LLC with minimal transition. If you’re looking for a Do-It-Yourself solution, download the below recommended resources.
Difference between Sole Proprietorship and LLC
A key difference between LLC and sole proprietorship is the status of being a separate, legal entity. By law, an LLC (limited liability company) is a legal entity separate and distinct from its owner(s). This means that your sole proprietorship LLC, on its own, can legally sue and be sued, can own assets, can borrow funds, can be held accountable for liabilities, and can exercise many of the business rights that you yourself exercise. In contrast, you and your sole proprietorship are legally one-and-the-same.
This difference between sole proprietorship and LLC has advantages and disadvantages. For the most part, the advantages favor using the sole proprietorship LLC structure. Here’s an example: in New York, the law restricts the amount of interest sole proprietorships can be made to pay [link to Sole Proprietorship Cheat Sheet and Formation Checklist]. However, that same restriction may encourage lenders to prefer to lend to LLCs and corporations which do not benefit from the restriction. You’ll need to weigh your own circumstances to figure out if a sole proprietorship LLC is best for you.
For most people considering either starting out with the sole proprietorship LLC structure, or going from sole proprietorship to LLC, the difference between sole proprietorship and LLC comes down to limited liability. As a separate legal entity, a sole proprietorship LLC owns the business assets and is responsible for all business liabilities. This allows you to avoid the unlimited liability of a traditional sole proprietorship. A well constructed sole proprietorship LLC operating agreement can enhance your LLC’s basic liability protection.
Can an LLC be a Sole Proprietorship?
Some people question whether an LLC can be a sole proprietorship and feel that they must choose between LLC or sole proprietorship. This confusion comes up due to the difference between a sole proprietorship and an LLC, which is discussed above.
One way to think about it is to imagine that you are wrapping your sole proprietorship (which is legally part of you) in the protective blanket of an LLC. The result is a separate entity – a sole proprietorship LLC. So yes, technically, the answer to “is an LLC a sole proprietorship” is No, because all LLC’s are not sole proprietorships. But some LLC’s can be the LLC equivalent of a sole proprietorship.
Let’s look at some characteristics of the sole proprietorship LLC. The first and principal characteristic is having one owner, known as a single member. So the sole proprietorship LLC is a single member LLC (limited liability company). The second characteristic is pass-through, also known as “flow-through,” taxation which is discussed above. The third characteristic is limited, corporate-style, liability. For a more detailed look at all three characteristics, click here.
The bottom line is that you don’t have to choose between sole proprietorship or LLC. The sole proprietorship LLC structure allows you to enjoy the benefits of a sole proprietorship while being wrapped in the protections of the LLC.
Sole Proprietorship or LLC for Small Business?
If you’re starting a new business, or already have a sole proprietorship, how do you make the decision? You want to know, sole proprietorship or LLC?
To answer that, let’s look at some core sole proprietorship benefits: (a) easy to start due to minimal paperwork; (b) easy to end/transition due to minimal legal requirements; (c) potential financial wipe-out if something goes wrong in between.
Let’s compare the sole proprietorship LLC: (a) filing requirements mean more work to get things started; (b) more work to end/transition due to legal requirements; (c) full legal protections if anything goes wrong, plus other benefits.
In my opinion, you go with the sole proprietorship LLC every time, particularly if there’s a relatively low-cost way to do it. Even if you’re “judgment proof” (have no assets to lose), the LLC form of sole proprietorship gives you more ability to grow your business in today’s world. If your sole proprietorship is a second or third income, use the sole proprietorship LLC wrap to protect your first or second income from a possible sole proprietorship disaster.
The LLC for sole proprietorship is the recommended structure for today’s world. Traditional sole proprietorships developed in the world of small towns where the butcher, baker and candlestick maker knew everybody and everybody knew them. Today, you know less about your customers and suppliers and therefore are more likely to need the extra protection a sole proprietorship LLC gives you.
You may have further questions such as, how does a sole proprietorship LLC file taxes, or do you need a sole proprietorship LLC? These, and other questions, are answered in the free report, “What the Other 5% do to Sleep Easy at Night.” The SBA reports that 95% of sole proprietorships are unincorporated, facing totally unlimited liability. The report tells you what the other 5% do, why they do it, and provides a self-help action plan that allows you to get your sole proprietorship LLC started easily.
If you need a sole proprietorship LLC operating agreement, tailored to the sole proprietorship operating environment, that takes advantage of all the enhanced liability protections legal in the state of New York, download the Sole Proprietorship LLC Operating Agreement.
For help going from sole proprietorship to LLC schedule a consultation or call (646) 435-0668.