I was surprised that so many people expressed interest in hearing about my transition from a sole proprietorship to an LLC – I thought something like this would be super boring. But since you asked, here it is! And if you’re already bored, here is a picture of the most regrettable tattoo ever. (If you click that link, be prepared to lose hours of your life that you can never get back.) Coincidentally, that guy should read this post because said tattoo will probably prevent him from ever getting a real job.
I honestly had no intention of changing my business to an LLC. It seemed so official, and I’m always mindful of the fact that I could end up returning to traditional employment at any time. Remaining a sole proprietor seemed safer; that way if I did have to get a job, I could just walk away. Plus I felt like my taxes would suddenly become even more complicated than they already are.
Business Registration FAIL
Last Wednesday, I went to the local county clerk’s office to file an assumed name certificate. In Kentucky, a sole proprietor who wants to use a business name simply files that certificate. Basically, it says, I am just one person, but I want to be identified by my business name in business situations.
When I got to the county clerk’s office, I couldn’t figure out how to fill out the form. I had to check a box for my business type, but “sole proprietor” wasn’t an option. I felt like an idiot, but the lady at the counter didn’t know what to do either. So the county clerk himself had me come into his office, and he was also confused! He called the Secretary of State to find out why that option was missing, but after about 20 minutes on hold, he suggested that I just go home and file the paperwork for an LLC online instead.
I’ve researched the differences between various business types many times over the past year or so, but I still spent some time looking up the specific requirements for my state. The most important thing I learned is that the LLC offers two-way protection of my finances:
- If someone sues my business and wins, a judge can’t order me to use money from my personal bank accounts.
- If someone sues me personally and wins, a judge can’t order me to use money from my business accounts. (The only exception is if the judge suspects that the business was only created to hide my personal assets and isn’t really a business.)
I don’t plan on being involved in any lawsuits or anything, but I like the idea of separating my finances in that way. Plus it gives me some credibility – I’m no longer just a person doing business out of my house; I’m now a BUSINESS OWNER doing business out of my house. =P
The Process of Transitioning to an LLC
I’m sure the business registration process differs from state to state (I know the fee does!) but here’s how it works in Kentucky.
I had to create an account on the Kentucky One-Stop Business Registration Center website, which of course took some time because it’s run by the government. Then I had to answer some questions about my business and give basic info like the name, address, etc. I also had to run a search to make sure my business name wasn’t already taken (luckily I did this before I chose the name, so it wasn’t a problem).
Along the way, I had to register for a federal employer ID even though I don’t have any employees. It’s kind of like a Social Security number for the business. Then I submitted my articles of organization – that sounds scary, but it’s actually just a short summary of the information I entered during the first part of the process. I paid $40 and got a confirmation about 20 minutes later that my LLC had been approved!
One weird requirement in Kentucky is that you register with the Dept. of Revenue for a sales and use tax account. Since I provide services and not tangible products, I’m not required to charge sales tax (your mileage may vary depending on where you live), so I was confused. But apparently all businesses have to fill out the information and let the Dept. of Revenue decide whether or not you need a tax account.
Once a year, I’ll be required to submit an annual report and a $15 fee to the state. I always thought that sounded intimidating, but the annual report is almost identical to the articles of organization. Basically, I just have to list the owner (me), registered agent (me), and organizer (me) on a form and submit it online.
How Does Your Business Change When You Become an LLC?
Honestly, there aren’t many changes in the way I’ll do things as an LLC rather than a sole proprietor. There is a greater divide between business and personal money in my mind – for example, there were several business tax deductions I didn’t take for 2011 because I was worried about that blurry line between business and personal. Now I’ll have a separate bank account and there will never be any question – if I use my business debit card, you better believe that expense will be directly related to my work.
Another thing I’ve noticed is the difference in how I perceive myself and the work I do. All year, I’ve looked at my work and thought, Well, I guess this is a hobby that happens to be paying my bills. But now I see it as an actual company (probably because it is) and it makes me very motivated to see the company succeed and grow. I feel like I need to set goals and make plans, where before I was kind of flying by the seat of my pants.
For tax purposes, I’ll still fill out a Schedule C and Schedule SE because I opted to be taxed as an individual. And I still have to send in quarterly tax payments just like I did before. Other than my finances being more formally separated, Nuts and Bolts Media will keep going just like it did before. And now that I’ve lulled you into a dreamlike state, I hope you enjoy your nap!
Questions for You
If you’ve ever owned a business, what structure did you opt for? What’s the process like where you live? Have you ever regretted your choice? If you’re a sole proprietor, have you considered an LLC or other business structure?