The Transition from a Sole Proprietorship to a Corporation or Limited Liability Company


The Transition from a Sole Proprietorship to a Corporation or Limited Liability Company

Forming a separate legal entity is a smart move when it comes to developing credibility, lowering your audit risk and protect your personal assets. Most people do not complete the transition and are still operating part of their business as a sole proprietorship and part as a new entity.

This creates a lot of problems as you can imagine including exposure to your personal assets when you probably thought you were protected.

Below is a checklist that will help you double check to see if you are on the right track with your
business entity.

___1. Form a separate legal entity. The most common choices are either a corporation or LLC. A corporation
may be taxed as a regular corporation or an S corporation. An LLC can be taxed as a disregarded entity, an
S or C corporation or a limited partnership. All choices have advantages and disadvantages. An LLC has
an extra layer of protection called the “charging order” that protects the ownership interest if a partner is
sued personally for something unrelated to the operating company.

___2. Obtain a NEW EIN number (each separate legal entity requires a new EIN number).

___3. Obtain a corporate or LLC record book with the proper bylaws or operating agreement. If an LLC, the
operating agreement should match the number of members (owners) and the taxation type. For example,
a two-member LLC taxed as an S corporation has a different operating agreement than a single-member
LLC taxed as an S corporation.

___4. Obtain support with the completion of the corporation or LLC record book with both online support
and live offi ce support. When you work with NCP, our staff will schedule a 30-minute record book review
with you and you will have full access to our members area.

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