Transforming a Sole Establishment to a LLC: Practical Considerations
A sole establishment or sole proprietorship is a business owned by an individual and not a company. This individual will own 100% of the business, control all of its operations and can keep the total of any profits generated. He or she will also be wholly responsible for business debts and any other financial obligations related thereto.
A Limited Liability Company (LLC) on the other hand is a company with members who own a portion of the company’s capital. Each member is liable only to the extent of his or her share in the capital of the company.
Changing the legal status from a sole establishment to a LLC can be viewed as a combination between two legal procedures creating a limited liability company as well as transferring the ownership of a sole establishment.
Conceptually, the main aim of bringing in the change of legal status from sole establishment to a LLC is to shift from the position of unlimited liability and move toward the status of limited liability.
Against this background, there are several advantages associated with a change in legal status from a sole establishment to a LLC; some are summarized as follows:
1 – Distinct Entity
A limited liability company is a separate entity from its owners. Everything from the company bank account, to ownership of assets and contracts is company business and separate from the interests of the company’s shareholders.
2 – Limited Liability
Running your business as a limited liability company means you have the reassurance of ‘limited liability’.
Assuming no fraud has taken place, your ‘limited liability’ usually means you will not be personally liable for any financial losses made by your business.
3 – Professional
In some businesses and industries, having a limited liability company can provide a more professional image.
4 – Funding
Procuring funding can be difficult for various new businesses. However, because a limited liability company is a distinct entity from its owners, it may be slightly easier for a company to secure finance than it is for their sole establishment counterparts.
5 – Succession
If an owner in a LLC wishes to retire, sell his shareholding, or dies, it is usually easier to transfer ownership of a limited liability company than a sole establishment.