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Does It Make Sense to Convert Your Business from a Sole Proprietorship to an LLC?

Nearly three-fourths of all businesses in the United States start as sole proprietorships. The reasons are obvious: It is simple and uncomplicated. For many entrepreneurs and consultants, it initially makes sense because there is no cost.

While there are certainly advantages to being a sole proprietor, there are disadvantages as well. For example, while you reap all the rewards, you also assume all the liability. That means that if you work as a self-employed plumber and the toilet you fixed suddenly overflows and floods the first floor of a house; you could be stuck with the cost of repairs. And if the produce you sell from a farm stand at the end of your driveway causes food poisoning, you could be slapped with a personal injury lawsuit.

As a sole proprietor, you are personally liable – all your personal assets, including your house, your bank account and your investments are at stake if the judgment is against you.

As a limited liability company, you gain certain benefits, including:

  • Easy startup
  • Protection from personal liability through separation of business and personal assets
  • Pass-through tax treatment, thereby avoiding double taxation
  • Management flexibility

The steps you must take are fairly straightforward and include choosing a unique name for your business. It is also necessary to file articles of incorporation and other applicable paperwork with the state. As a limited liability company, you must also obtain an Employment Identification Number (EIN) from the IRS, whether you have employees or not. Once the state recognizes your entity, there are additional steps to take to shield your personal assets. You must have an initial ownership agreement, elect governors and hire managers (even though a single person can fill all of these rolls).

Minnesota business law is nuanced and can be difficult to understand without the assistance of a knowledgeable business lawyer. Learn more about your options and protect yourself by discussing your business goals with an attorney from Hess & Jendro Law Office, P.A..