Sole Proprietorship to LLC Conversion

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An artist makes her first sale or agrees to his first performance. This goes well, sales start to increase, and the document-428332_1280business begins to take off. While the artist may have already filed a business license and set up a sole proprietorship, he or she may now want to start thinking about setting up a business as a separate entity. Although artists have the option of creating several different types of legal entities, a limited liability company (LLC) provides many benefits without requiring too much work. On March 9, Madhu Singh from the Foundry Law Group led a workshop to help explain why artists may want to consider creating an LLC, the process for converting a sole proprietorship to an LLC, and how to maintain the entity once it has been created.

Reasons for Converting to an LLC

Why convert to an LLC? This type of entity may provide several benefits to your business, a few of which are highlighted here:

  1. Liability Protection: As a sole proprietorship, your personal assets are at risk if someone sues your business. However, if all of your business is done through an LLC (and it is properly maintained), only the assets belonging to the LLC can be made a part of a lawsuit.
  1. Potential Increase in Perceived “Legitimacy”: Some customers or potential business partners may be more willing to do business with an LLC over a sole proprietorship.
  1. Ease of Set-Up and Maintenance: While corporations can also provide many of the same benefits as LLCs, they generally require more work to create and maintain. LLCs require fewer initial and annual documents, which can help save time and money.

 

How to Convert

So how do you make the conversion? A few steps must be taken to get your business set up as an LLC.

  1. Search to make sure your business name, and any other names that you want to use, are available. You will want to search for these names on the Washington Secretary of State (SOS) website to make sure they have not been registered by any other business. You should also use Google (or another search engine) to check if anyone has started using the names you are planning to register. This can help to avoid issues, such as trademark disputes, in the future.
  1. Register with State Agencies.
  • Washington Secretary of State (https://www.sos.wa.gov/corps/): To set-up the LLC, you will need to register with the SOS. This can be done online or by printing out and mailing in a form (if done online, the processing time will be faster). When registering with the SOS, you will register your business name and can also register additional trade names, which are any names that you may want to use that are not the full legal name of the business, for an extra $5 per name.  You will also need to file an Initial Annual Report with the SOS.  If you register online, this report can be done at the same time.
  • Washington Business Licensing Service (http://www.bls.dor.wa.gov/): Once you have filed with the SOS, you will need to file a Master Business License with the State. This can also be done online or by paper form. Ms. Singh noted that if you have already registered a sole proprietorship with the SOS, you should call the WA Business Licensing Service (BLS) to close down the Unified Business Identifier (UBI) associated with it.
  1. City Licenses. Many cities require a city-specific business license if you plan to do business within city limits. You will need to check with your city to determine if you need to file a city business license.
  1. Apply for a Federal Employer Identification Number (FEIN) (http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Employer-ID-Numbers-EINs). This can be done online, and at the end of the application, a FEIN will be generated immediately. This number will be used when opening bank accounts and working with other third parties. (You can also apply for a FEIN as a sole proprietorship to avoid having to give out your social security number to third parties).
  1. Create an Operating Agreement. This agreement outlines the policies and procedures for how the LLC will conduct business. It is a good idea for every LLC, even if there is only one member, to have an operating agreement on file.

 

Maintaining an LLC

To enjoy all of the benefits of an LLC, it must be properly maintained. Taking some basic steps can help to make sure this happens.

  1. Keep Business and Personal Assets Separate. Open a separate bank account for the business and only use funds from this account for expenses related to the business. Reimburse yourself for any business expenses you have paid with personal accounts. When creating the LLC, you will have to pay for filing fees and other set-up costs out of your personal accounts. After you have set everything up, you can write yourself a check out of the business account for these expenses. These transactions should also be recorded in the LLC’s accounting records. When signing contracts, sign in the name of the LLC. This can help to avoid personal liability if the contract is later disputed.
  1. Renew the LLC Each Year. You will need to file a report and pay a fee to the SOS every year. The report and fee will be due in the month that you registered the LLC with the SOS.
  1. Pay Taxes. LLCs can elect to be taxed in various ways. As the business grows, it would be a good idea to talk to a tax advisor to learn about your tax options.

 

The workshop provided a great overview of LLCs, why artists may want to consider forming one, and how to start that process. If you think you may want to set up your business as an LLC, you should consider consulting an attorney for more information about how to complete the conversion and maintain the new entity.

Author: Jenna Lieske

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This post represents the views of the author(s) identified above and does not necessarily reflect the views of Washington Lawyers for the Arts (“WLA”). WLA provides this content as a public resource of general information. WLA does not warrant that the content is or will be complete and accurate. It is not intended by WLA, nor should it be considered by you, to be a source of legal advice. You should not rely upon the information provided. Rather, you should seek legal counsel for consultation and advice.