Why and When Should You Convert Your Sole Proprietorship to an LLC

Most new businesses start as sole proprietorships because of the simplicity. They are easy to form and allow owners to keep taxes and legal matters as uncomplicated as possible. However, this business type may only suit your needs for a while. It will make you consider transitioning to a limited liability company (LLC) as your business needs evolve.

But how do you know if it’s time to upgrade from a sole proprietorship to LLC? Here are some critical differences between both business entities.

1. Personal assets

In a sole proprietorship, the owner is responsible for all liabilities. This means creditors can go after a sole proprietor’s home, bank accounts, and other personal property to satisfy business debts or other obligations. 

On the other hand, an LLC is a legal entity on its own, separate from the owner. As such, a member is not personally liable for the debts of the LLC and can protect the owner’s personal assets.

2. Tax flexibility

With sole proprietorships, whether you like it or not, the business income gets taxed at the owner’s personal tax rate. You are also responsible for paying self-employment taxes.

Unlike sole proprietorships, LLCs can be taxed as a sole proprietorship, partnership, S-Corporation, or C-Corporation and may save money. Many people often go with S-corp because it offers numerous tax benefits.

3. Hiring employees

As the employer, a sole proprietor is responsible for filing the appropriate tax forms on a timely basis and proper administration for these hires, which can be overwhelming. You can look at switching to an LLC if you often struggle with legal requirements and payroll taxes. Because LLCs separate the business’s operations and financials from the owner’s, it can make managing full-time employees simpler. Additionally, if an employee were to injure himself at work, you can have protection on your personal assets in the case of a lawsuit.

4. Liability protection

If you don’t convert to LCC as soon as a partner joins your business, you are putting your personal assets at risk. When you form an LLC, your assets will remain protected. The wrongdoing or negligence of your partner or an employee is still your full responsibility. This means you and your personal assets will be held accountable.

Moving from a sole proprietorship to LLC may be just the next step in your entrepreneurial journey to put your business on a trajectory toward growth while keeping your personal assets safe. As a small business owner, taking risks and making changes can be terrifying. If you have concerns about changing your business entity to an LLC, don’t be afraid to seek out professional advice.