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

Forming a separate legal entity is a smart move for developing credibility, lowering your audit risk, and protecting your personal assets.

Most people do not complete the transition and are still operating as a sole proprietorship and part of a new entity.

Capitalize an LLC

This creates many 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 an 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 (each separate legal entity requires a new EIN).

___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 completing the corporation or LLC record book with both online support and live office 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 NCP member’s area.

___5. Open a new bank account in the name of the corporation or LLC (even if you have one with a similar business name as a DBA, you will need a new one under the corporation or LLC and the EIN.

If you have a DBA name now linked to the corporation or LLC (that is key), you may have the new corporation or LLC name and DBA name on the new checking account.

___6. Capitalize the new corporation or LLC. This means you will put money in the new bank account to exchange ownership interest in the corporation or LLC.

This may be $1,000.00 or more of capitalization to get the company started. A husband and wife with a two-member corporation or LLC should each
capitalize the corporation or LLC separately.

___7. Obtain a business debit and credit card. The business debit card will be automatic. The business credit card you will need to apply for.

Ask the banker where they pull your personal credit (which bureau) and
what the minimum your personal credit score has to be.

Ask what your revolving debt level has to be and if you have any major derogatories if those will be an issue before you apply.

___8. Move your merchant account to the name of the corporation or corporation or LLC (if you accept credit cards in your business). Most in network marketing are processing their orders on credit cards to
the main company for processing.

If you accept credit cards directly, make sure you complete a new
merchant application in the corporation or LLC name and point that revenue to the new bank account under the EIN of the corporation or LLC.

___9. Transfer any business assets to the corporation or LLC. This may involve any equipment or tools of your business. Check with your CPA first to determine if any assets have been depreciated or written
off, creating a taxable event moving to the entity.

It may make sense in some cases to leave the business assets in your name. This is a case by case basis that will require more professional help.

___10. Obtain a new business license in the name of the corporation or LLC. You should check on local requirements to determine if you are required to have a business license for a home-based business.

You may live in an area that does not allow home-based businesses, which may force you to hang a business license as an office location (if required).

___11. Establish a 5-year business plan (avoid being classified as a hobby).

___12. Set up the chart of accounts for the new entity with some accounting software.

___13. Use a payroll service when it comes time to start payroll. NCP recommends ADP for payroll nationally, and we have a resource for you.

You may also want to check with your accountant and attorney for legal and tax implications from hiring employees.

___14. After everything is up and running with the new LLC/Corp, close out the bank account to your sole proprietorship and dissolve the DBA name linked to you personally.

A common mistake is to continue operating the sole proprietorship while you are operating the new corporation or LLC.

___15. Update any contracts, agreements, insurance, and licenses in your name personally as to which ones need to be transferred over or redone in the name of the corporation or LLC.

___16. Update your status with your networking company that future commissions be paid to the corporation or LLC under the EIN, not to you personally anymore.

___17. Update all your sources of income with the new Tax ID number of the new entity. Your goal is to avoid receiving unnecessary 1099’s (meaning you want the money, just not to yourself individually anymore) for affiliate or referral fees by the end of next year. Make sure all your affiliates are updated with the new entity information.

___18. Update any insurance to now be in the name of the corporation or LLC. Make sure this does not change your policy or premiums (and coverage).

___19. Get new business cards. Don’t be cheap even if the only difference in the name of your company is “LLC” or “Corporation.”

___20. Check with your attorney or CPA for any steps missed at the state level, involving sales tax, or any other state compliance issues.

___21. A Nevada corporation or LLC, and you live in another state. The corporation or LLC should foreign register to do business in the state where you live and operate your business. If you formed a corporation or LLC in your home state, this step is not necessary.

Related Topics:

Leave a Reply

Your email address will not be published. Required fields are marked *

Follow Scott for timely strategy updates