7 Things You Need to Do After You Form Your LLC

7 Things You Need to Do After You Form Your LLC

Apr 4, 2021 4:36:10 PM / by SoleVenture

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So you just formed your LLC and now you're wondering what you need to do now. Let's break it down:

  1. Get a new EIN Number. Even if you had an EIN as a sole proprietor, it’s time to start anew.
  2. Create an operating agreement. Your responsibilities as an LLC owner to the LLC itself should be detailed in the LLC's operating agreement. This is less important for single member LLCs, i.e., for a freelancer. Whether you have an agreement or not, you have a duty of care that requires you to act in good faith and exercise reasonable care in carrying out your responsibilities.
  3. Stop using your sole proprietorship. The main benefit of the LLC is protecting yourself from personal liability. That means you only use your LLC for your business.
  4. Open a new business bank account for your LLC. For the same reason, you must treat the LLC as a separate entity—including keeping all personal assets separate—otherwise, you risk losing the protection of limited liability.
  5. Determine if you’ll have to reapply for business licenses and permits. Some states and local licensing agencies won’t transfer business licenses and permits from a sole proprietorship to an LLC. Research your state and local government’s rules (which are usually available on their websites).
  6. Update contracts and agreements. When changing from a sole proprietorship to an LLC, review your existing contracts carefully. Depending on the contractual language, you may or may not be able to assign the responsibilities you had as a sole proprietor to the LLC. If the contract doesn't allow for this, you may need a new contract.
  7. File a “final” tax return for your sole proprietorship. How you choose to be taxed going forward is based on whether you elect to file as an S Corp or not. The tax option that will be most advantageous to you will depend on the specifics of your situation. You should talk to an accountant or a trusted tax advisor for guidance when making this critical decision.
    If you don't elect to file as an S Corp: LLC’s profits will be passed through in your personal income tax return (on Schedule C and Schedule SE). You’ll continue to pay your estimated taxes on a quarterly basis. The LLC itself does not file a return because it is considered a disregarded entity for tax purposes. In other words, nothing really changes for federal income tax purposes.

    If you elect to file as an S Corp: You will file partial Schedule C for the part of the year you were a sole proprietor and then file your taxes as an S Corp with a short fiscal year. At income tax filing time, an LLC taxed as an S Corp files IRS Form 1120S. Also, the LLC member(s) must report their share of the profits on their individual Form 1040 and on Schedule K-1 in Form 1120S.

After you taken these 7 steps, you will have to keep up with business compliance requirements. An LLC’s compliance obligations will depend on the state’s rules governing the LLC and local regulations that apply to the business. In every state, you will be required to file annual or biennial reports.

Congratulations on taking the leap! Have more questions? We're here to help. 

 

SoleVenture

Written by SoleVenture