How to Become an LLC Business

By Elizabeth Rayne

The choice of business structure is one of the first and most important business decisions a new owner can make, but the decision is not set in stone. If you are running an existing business as a sole proprietor, partnership or corporation, you may choose to convert the business into a limited liability company. An LLC is a hybrid business structure, providing the limited liability features of a corporation while maintaining the ease and flexible management style of a sole proprietorship or partnership.

Sole Proprietorship and Partnership Conversion

If your business is operating as a sole proprietorship or partnership, you may convert it to an LLC with the consent of the owners. In most states, you do not need to register sole proprietorships or partnerships with the state because these businesses are not independent entities that exist separately from the owners. If the owners agree to change the business entity type to an LLC, you'll need to register the company with the state by filing articles of organization with your state's business registrar, or similar official. By converting to an LLC, the owners will no longer be personally liable for the future debts of the business.

Corporation Conversion

If your business is already organized as an independent entity, such as a corporation, you may convert the business into an LLC if your state has a conversion statute. Many, but not all, states have conversion statutes that provide a relatively simple process for changing from a corporation to an LLC. The statute may provide that, after filing for conversion, all prior obligations and property of the corporation are transferred to the LLC -- all prior lawsuits or proceedings against the corporation will continue against the LLC as if the conversion did not occur. Generally, a conversion from a corporation to an LLC will lessen the tax obligations for the company, but the IRS will likely treat the conversion as a taxable event for the shareholders.

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Corporate Dissolution

If there is no conversion statute in your state, you must first dissolve the corporation and reform it as an LLC to convert your corporation into an LLC . The shareholders must agree to close the corporation and liquidate the corporation's assets to make distributions to the shareholders. After the corporation is dissolved, you must file articles of organization with the state business registrar to set up the business as an LLC, which will be considered a new business, as opposed to a converted business.

Employer Identification Number

If your business already has an Employer Identification Number, or EIN, you may be required to obtain a new number. The IRS does not recognize an LLC as a business entity; instead it requires the company to choose how it wants to be treated for tax purposes. For example, an LLC may elect to be treated as a partnership for tax purposes; thus, if an existing partnership converts to an LLC, it is not required to obtain a new EIN. However, if you dissolve an existing corporation and form a new LLC, you must obtain a new EIN.

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Canceling an LLC
 

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How to Change the State of Incorporation

Corporations have several options when it comes to expanding to new locations or relocating the home base. The state in which the corporation chooses to incorporate is known as its home base, or "domicile." The corporation is considered a citizen of that state. It is relatively easy to obtain the authority to operate in other states as a foreign corporation, while changing the domicile is a more complicated procedure.

What Types of Businesses Can Be Converted to an LLC?

All states have either enacted the Uniform Limited Liability Company Act or a law with similar provisions authorizing the formation of limited liability companies. According to these state laws, an LLC can be established for any lawful business purpose. Because of the flexibility of this type of business structure, an LLC is suitable for virtually any type of business enterprise. An LLC is established through the filing of articles of organization with state government. An LLC provides two significant benefits to the owner. First, an LLC provides the same type of liability protection normally associated with a corporation. An owner is not personally liable for the activities of the business organized as an LLC. Second, unlike a corporation, in which an owner faces the prospect of double taxation, an LLC offers a pass-through tax mechanism. With an LLC, an owner faces only tax liability one time.

Going From Multi Member LLC to Single Member LLC

You don’t have to keep the same members in your business, even if you start off as a limited liability company. Your LLC’s members can sell their shares of your business to someone else, continuing the business’s status as a multiple-member LLC, or sell their shares to you, creating a single-member LLC. Though your business will continue to operate normally, you will likely need to change your tax elections and accounting methods.

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