In a sole proprietorship [single ownership] the company and the owners are the same, according to the law. This means, if the sole proprietorship company defaults a debt, so does the owner. Filing a lawsuit against the sole proprietorship company is the same as prosecuting the owner.
On the other hand, if the sole proprietorship company transforms into a single member LLC [SMLLC] the company will take all the responsibilities. It means if there is a lawsuit against the company then the owner’s assets are protected. So, every new sole proprietor must consider such worst conditions and choose to file for SMLLC to build a sustainable business.
Documents needed to file SMLLC
Article of Organization – For legalizing your business, file the Article of Organization with the state from where your company will operate. The document includes your company’s name, purpose, estimated duration, registered agent’s name, and management structure.
The precise requirement for Articles of Organization differs from one state to another, but it generally includes details about your company, its management, and who will run it.
Operating Agreement – It is a pact between LLC members just like in a shareholder or partnership agreement. The document mentions the organization’s structure. It defines the rights, responsibilities, and duties of the members associated with LLCs’ finance and operation.
It even covers what happens when one member desires to quit the business and when or how a member can sell or transfer their LLC interest.
Why do SMLLCs need an operating agreement?
In a single member LLCs, only one individual is handling all the associated business duties, rights, and responsibilities then is there a need for an operating agreement.
………..There is a remarkable reason and that is for your protection!
You are launching a new company and want to ensure that every legal document is in order. If your state does not legally need an operating agreement for LLC, it doesn’t mean you can skip it!
Single member LLC operating agreement is an important document even if your state does not need it legally. Here are some reasons – who own the business? You started a Browns, LLC in 2017 and are on the way to sell it. You don’t have any proof about owning the business, so how will you meet with prospective buyers.
The Article of Organization document you filed with the state does not mention that you own it. Your name may be mentioned as the registered agent but it does not mean you are the owner. An operating agreement is proof that you own the company.
Another reason is that it will help to keep business and personal assets separately. You enjoy liability protection for which you created the LLC. Even investors and banks may need the operating agreement because it is proof of ownership.
Tax associated with business income from SMLLC is determined at a personal level. There is no strict differentiation of single member LLC taxes from personal taxes. However, it is crucial to understand that the profits from SMLLC can tremendously influence your personal tax situation.
Sole proprietors are taxed at an individual tax rate while LLCs pay 15% on the first $50,000 of retained income and 25% on an extra $25,000. The single member LLC tax rate is much lower than sole proprietorship.
With the help of Savvy & Suite advisors, you can develop a plan that aims to save on taxes!