Changing your legal status from sole proprietor to limited liability company (LLC) is a simple process usually done to provide a business owner with protection against business liability claims on personal property. Numerous services provide quick, easy and inexpensive assistance in accomplishing this task, or you can use an attorney if you need extra professional help. It usually costs more to have an attorney file your incorporation papers but if you have a complex business structure or are unsure how to proceed, it is advisable to hire an attorney rather than risk making a mistake.
Applying for an LLC
Select a name for your LLC. Create at least three choices, as each will be searched against existing corporate names for duplications and other conflicts. If your business is known by a name that you cannot use as your legal name, you can operate your business under a DBA (doing business as) of the LLC.
The LLC legal designation is governed by your state laws and is normally administered by the secretary of state. If you wish to form an LLC yourself or search your legal name, contact the secretary of state.
Decide who will be on the board of directors and who will be officers of the corporation. You will need Social Security numbers, drivers licenses, passports and other identification as well as residential addresses.
Owners of your LLC are called members and can include individuals, corporations, other LLCs and other legal entities according to the regulations in your state.
Designate a legal physical location. Check your state's requirements, but generally you cannot use a post office box as your legal address. You may be able to use your home address, or it may be permissible to use a mail service address such as Mail Boxes Etc. which provides street address mail drops with locked service boxes for customers.
Check with the state's secretary of state to make sure you understand the requirements. If you are using an online legal service such as LegalZoom.com, My Corporation or Incorporate.com, you will be provided with a questionnaire that will guide you through establishing an LLC, keeping you in compliance with requirements. These services will also do the legal name search and publish your fictitious-name notices. The cost of using a service varies but starts at about $150. An attorney will cost more. If you do not use an attorney or incorporation service, you will need to create corporate documents such as articles of organization and bylaws (also called the Operating Agreement). There are templates available online for these two documents.
Assign a registered agent, the designated person who will receive communications from the state and other legal authorities for your LLC. You may function as your own registered agent or use the registered agent service (approximately $150 annual fee) offered by the incorporation services. Your attorney can act as your registered agent, but the cost will be higher.
Obtain your taxpayer identification number. Usually as soon as your legal name has been cleared, your LLC will be registered. This usually takes less than two weeks. Once that is done the state will send you a state identification number that you can use to obtain a federal tax I.D., also known as an Employer Identification Number (EIN). You can apply for this by phone and should be assigned a number immediately. Your EIN will enable you to open a bank account for your new legal entity. When you file your first income tax report you will be able to decide whether you wish to be taxed as an S-corporation or a regular corporation. Your accountant can help you decide which is most appropriate for your financial situation.
- You might need to publish a fictitious-name announcement in local newspapers. Most states require publication in at least three newspapers. Your local newspaper will be able to assist you. Incorporation services can do this for you as part of your fee.
- The LLC is simply a legal envelope that separates the LLC's assets from your personal assets, so once you have formed the LLC you must transfer all your business assets to the LLC's ownership to protect your personal assets from business liability.
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