There are a number of advantages sole proprietors gain by converting to a limited liability company or a corporation. Forming a limited liability company allows you to receive personal asset protection, while still maintaining an informal operating structure. Corporation structure tends to provide credibility and longevity in comparison to sole proprietorships. Customers and vendors understand that corporations have to follow certain rules and regulations to stay in business, whereas states do not govern and regulate the operation and formation of sole proprietorships.
As a sole proprietorship, you have unlimited liability for your company's debts and obligations. This means if the company is sued, you could lose your home, car and other personal valuables. However, if you form an LLC or a corporation, you have limited liability protection against the company's liabilities. Unlike a sole proprietorship, your personal valuables are not involved when you form and operate a corporation or an LLC. Your liability for company debts and obligations does not extend beyond the amount you invested in the business.
If you operate a corporation or an LLC, you could have an easier time raising capital. As a sole proprietor, you must rely on your company's assets or use your personal credit to secure loans. LLCs may attract foreign investors; other corporations and partnerships can invest in an LLC. Corporations can issue stock as a way of expanding the business or to pay off the company's existing obligations. Furthermore, a corporation may trade its shares publicly on the New York Stock Exchange and NASDAQ, allowing the company to potentially raise huge sums of money.
Another advantage LLCs and corporations have over sole proprietorships is duration of existence. When you operate a sole proprietorship, the business ends automatically when you die, retire or sell the business to someone else. This does not happen in an LLC or a corporation. LLCs and corporations can exist until members and shareholders of the business decide to dissolve the business. Shares of a corporation can be traded freely without interrupting the company's day-to-day activities. In an LLC, the members of the company must agree by unanimous vote before a new member can be admitted into the business.
Converting from a sole proprietorship into a corporation provides you with certain fringe benefits not enjoyed by sole proprietors. When you incorporate your business, you do not have to pay tax on fringe benefits received from the company, such as disability or health insurance. However, you must make the same benefit available to at least 70 percent of your workers. Sole proprietors may have a harder time attracting quality employees in comparison to a corporation or an LLC. Corporations and LLCs can offer ownership interest in the business as part of an employee's compensation.