Should You Transition Your Sole Proprietorship to an LLC?

LLC formation

A sole proprietorship has many advantages in terms of simplicity, making it easy for one person to start their own business. However, it’s also possible for even a company of one person to form a limited liability company or LLC. There are numerous reasons for a business conversion.

You’re Hiring More People

Both LLCs and sole proprietorships may have employees. When a business owner comes to the point they wish to hire full-time employees, transitioning to an LLC can be beneficial for the protection of personal finances.

A business owner’s personal and company finances are considered the same in a sole proprietorship. So, if there’s an accident and an employee pursues legal action, or an employee makes a mistake that leaves a customer unhappy, the owner could be left personally financially responsible. An LLC separates personal from LLC finances, so financial matters that affect the company can’t touch the owners personal savings.

You Want to Get a Loan

LLC status brings more tax and administrative complexity, but it also opens up business opportunities. If a business is seeking loans for expansion, banks and other lenders are more receptive to an LLC than a sole proprietorship. 

Lenders view LLCs as more secure than sole proprietorships due to the financial separation between what is considered personal and business. Sole proprietors can only have one owner funding the business, while LLCs can legally seek out investors. This generally translates to lowered risk for investors, making them more interested in investing in a particular business venture. 

It’s the New Year

For businesses looking to start fresh in the new year, converting to an LLC may be a first step to meeting business expansion goals. Business owners may be more apt to venture out into new states or make new hires with the added protection an LLC provides. 

While a sole proprietorship may have the simplicity a new business owner looks for when first starting out, an LLC structure conversion may be the better bet as time goes on.