Both sole proprietors and partnerships can convert to a limited liability company. Owners of LLCs are called members, not shareholders.

Until recently some states did not allow one-member LLCs . This is no longer the case. One-member LLCs are allowed in every state.

LLCs are set up by filing articles of organization with your Secretary of State and paying a fee. Fees vary from state to state. They could be as low as $50 or over $500.

Key Points – LLC Tax Advantages

•Every LLC must also have a registered agent. This to provide a physical address where it can receive tax notices and legal documents.

•Every LLC should have an operating agreement. This is not a requirement.

•You can either set up your LLC yourself, for example by using one of the various books. There are also websites that will do everything for you for a fee.

•For example mycorporation.com charges from $150 plus state fees.

Apart from having different fees each state has different rules for LLC formations. Some states such as New York require that LLCs publish a notice of formation in a local newspaper. This could cost over $200.

By default LLC tax deductions are taxed as sole proprietorships or partnerships. This means a one-member LLC is taxed in exactly the same way as a sole proprietor and must complete Schedule C. An LLC with more than one member is taxed like a partnership and must complete Form 1065.

An LLC can also opt to be taxed like a corporation. You can then receive fringe benefits as an owner-employee and not have to pay tax as long as you meet the IRS guidelines.

Often it’s best to have the LLC tax deductions taxed as a sole prop or part in the early years when profits are small or there are losses. Later on it may be better to elect for s-corporation or c-corporation tax treatment.