A Corporation, Limited Liability Company, or other business that’s registered with the state must comply with all rules and regulations pertaining to how it operates to be considered in good standing.

A business that doesn’t remain in compliance can lose its good standing status, exposing it to serious consequences, including fines and the inability to secure financing or file a lawsuit. In worst case scenarios, a business could be administratively dissolved by the date—effectively shutting it down.

Why Should a Business Care about Good Standing?

A company that’s in good standing with the state can operate normally, without interference or obstacles from regulators. A huge advantage of remaining in compliance is uninterrupted limited liability protection, which protects owners from potential loss of their personal assets.

A business that’s in good standing can operate under its chosen name and take advantage of benefits such as the ability to expand into other states, renew permits or licenses, buy business insurance, seek financing, and transfer ownership of the business.

What a business must do to remain in good standing varies from state to state, but most states require businesses to file required reports, pay fees, maintain a registered agent, file taxes, renew business licenses and permits, and keep personal and business finances separate. You can read more about those requirements in CorpNet’s article, “How to Keep Your LLC or Corporation in Good Standing.”

When a business falls out of good standing for failing to comply with rules the state can step in, possibly taking action that disrupts business operations, jeopardizes the reputation of the company, and causes other problems that can be harmful to the business.

Possible Consequences of Loss of Good Standing

Taking all the steps necessary to remain in compliance with the state can be cumbersome, but not doing so can result in severe consequences. Consider what could happen if your business loses its status of good standing.

• Fines and penalties – States can issue fines and penalties on businesses that have not complied with their regulations and fallen out of good standing. The amounts of fines may increase if they’re ignored or not paid on time.
• Loss of limited liability protection – A company that’s not in good standing risks losing its limited liability protection and putting owners at risk. In certain situations, a court might decide to pierce the corporate veil, which is the layer of protection separating business assets from the personal assets of owners. If the veil is pierced, limited liability is eliminated and officers, members, and directors of the company can be held personally liable. A court generally rules in favor of piercing the corporate veil for serious noncompliance issues, such as co-mingling of business and personal funds and assets, borrowing money while knowing it cannot be repaid, or participating in criminal activity.
• Risk of business identity theft – Criminals increasingly take advantage of companies that have fallen out of good standing. Sensing vulnerability, they use the opportunity to steal business identity for the purposes of borrowing money, getting access to bank accounts, or making purchases under the company’s name.
• Difficulty getting financing – A business that’s not in good standing with the state is likely to have difficulty obtaining a loan or getting financing from a bank because it’s considered to be high risk.
• Loss of its business name – If a company is not in good standing, its right to its business name may lapse. If another company claims the name before the non-compliant business can retain good standing, it could lose its right to use it.
• Loss of access to the court – An LLC or Corporation that’s not in good standing may not be able to file a lawsuit until the standing has been restored. That could prevent it from filing a suit to claim compensation that’s owed to it, sue someone for breach of contract, or taking other legal action.
• Tax liens – A business that’s lost its good standing for not paying taxes may be subject to tax liens from the IRS or a state or local taxing authority. The lien acts as a legal claim against assets of the business, putting bank accounts, real estate, intellectual property, and physical property at risk. In the case of an entrepreneur who runs a business that’s not registered with the state, personal assets could be at risk. A record of a tax lien also can negatively affect a company’s business credit score, making it difficult to take out loans or secure credit.
• Administrative dissolution of the business – As noted previously, a state can remove the rights of a business to conduct business and force it to shut down. Even if the business is able to work with the state to eventually reopen, the dissolution can result in loss of customer confidence, a tarnished reputation, hefty legal fees, and other negative consequences.

Staying in Good Standing

Keeping your business in compliance so it remains in good standing with the state is one of the most important tasks of running a company. Unfortunately, regulations and rules can be cumbersome, and it’s not unusual for them to be overlooked or forgotten.

As you’ve read, however, the consequences of failing to remain in good standing can be devastating to a business. Because requirements for good standing vary from state to state, you’ll need to make sure you know what rules apply to your business and make sure you adhere to them.

If you worry about forgetting to file an annual report, failing to get your taxes paid on time, or taking or neglecting another action that could cause your company to lose its good standing status, you might benefit from help from an individual or company that can make sure your business is always in compliance. Loss of good standing can be extremely disruptive, resulting in unnecessary expense and distracting you from the important tasks of operating your business.

There comes a time when it could very well make sense to elect S Corporation status for your Limited Liability Company (LLC).  An LLC, if it meets IRS eligibility requirements, has the flexibility to be taxed as an S Corporation. This can potentially lower the business shareholders’ personal tax burden as only their wages and salaries (not their profit distributions) are subject to Social Security and Medicare taxes. Consider these signs for when it could be time to change an LLC to an S Corporation.

Financial and Tax Indicators

• You want to bring on investors. You’re ready to take the company to the next level and to do that, you need financial support from other sources. Sometimes investors are more willing to back an S Corporation than an LLC as they feel more confident in the company’s viability and legitimacy.
• Your net business profit (after taxes; before owner draws) is consistently at or above the range where your self-employment tax obligations (Social Security and Medicare taxes) start to exceed what you’d pay if splitting your business income into a salary and distributions. The range can vary but generally the threshold is when net profit reaches around $40,000 to $50,000 or above.
• You actively work in the business and could pay yourself a reasonable W-2 wage or salary for your role. Additional profits would be paid as distributions, subject to income tax but not Social Security and Medicare taxes.
• Your company’s financial projections indicate your business will have ongoing profitability. A trajectory that can justify the initial costs of S Corporation set up and ongoing compliance and payroll costs.

Compliance Considerations

• You feel prepared to manage payroll (or hire an accountant, bookkeeper, or payroll services provider), i.e., handle reporting and making payroll tax deposits, issuing W‑2s, and filing an annual S Corporation tax return (Form 1120‑S).
• You can justify and document your rationale for your “reasonable compensation” salary based on responsibilities, hours, industry pay for comparable positions, and business performance. The IRS has been known to scrutinize shareholder-employee wages and salaries, and anything that may represent underpayment in an attempt to game the system to disproportionately minimize Social Security and Medicare tax liability.
• Your LLC meets the IRS’s requirements for S Corporations. It must have fewer than 100 members because an S Corporation may have no more than 100 shareholders. Also, your LLC may not have any members ineligible to be S Corporation shareholders (such as nonresident alien owners, partnerships, or corporations).

Timing Food for Thought

• You are prepared to file Form 2553 for the S Corporation election for the current tax year by the applicable deadline. For existing LLCs, this is typically within 2 months and 15 days after the start of the tax year (which is mid‑March for a calendar‑year business). Newly formed LLCs must file within 2 months and 15 days of their entity’s formation effective date.
• You want to lower your audit risk associated with Schedule C reporting. Various sources indicate that S Corporations are less likely to undergo IRS audits than LLCs, Partnerships, and Sole Proprietorships.

Learn More About Why and How to Switch to an S Corporation

• What Is an S Corporation?
• The 2026 S Corporation Election Deadline Is Right Around the Corner
• S Corporation Vs. LLC
• What Is Reasonable Compensation for an S Corporation

If you’ve been operating as a Sole Proprietor and are wondering if you should register your business with the state and form a Limited Liability Company (LLC), the answer is a “yes.”

Although Sole Proprietorships are the most common type of business entity in the United States, they come with significant risk for owners. That’s because a Sole Proprietorship is not a separate entity from its owner – there’s no legal distinction between the two. If a Sole Proprietorship is sued or can’t pay its debts, the personal assets of the owner are at stake.

An LLC, on the other hand, is registered with the state and considered a separate legal entity from the owner or owners. That separates owners from the business in the event the LLC is sued or can’t repay debt and protects their personal assets. For that reason alone, I argue that an LLC is normally a better – and safer – type of business entity under which to operate.

About Sole Proprietorships

If you’re operating as a Sole Proprietor, you, essentially, are your business. The assets and liabilities of the business are also your personal assets and liabilities, as there is no legal separation between the two. If someone starts getting paid to make wedding cakes or build decks and patios or provide childcare, that person is, by default, a Sole Proprietor.

Many people like Sole Proprietorships because they’re easy to get up and running – no paperwork required. A Sole Proprietorship is not registered with or recognized by the state, meaning the owner doesn’t have to file any paperwork to get started, or submit annual reports and pay yearly fees.

Sole Proprietorships are subject to pass-through taxation, meaning that all income and losses of the business flow through to the personal tax returns of owners, who use their own Social Security numbers to file.

It’s likely that a Sole Proprietor will have to pay quarterly taxes, and they’ll be responsible for paying a self-employment tax, which is a combination of Social Security and Medicare taxes. While employers pay half of the Social Security and Medicare taxes for their employees, someone who is self-employed, like a Sole Proprietor, is responsible for the total amount.

A Sole Proprietor also may be required to obtain business licenses and permits, which may be issued by the local, state, or federal government. The types of licenses and permits needed depend on where you live and the type of business you have.

Also, a Sole Proprietorship that operates under a name that’s different than the legal name of the owner will need a DBA, or “Doing Business As” from the state.

About Limited Liability Companies (LLCs)

A Limited Liability Company is a business entity that registers with the state by filing Articles of Organization, which is a public document that provides information about the company. An LLC with one owner, known as a member, is called a single-member LLC, while a business with more than one owner is known as a multi-member LLC.

Once it’s registered with the state, an LLC must file annual reports and pay yearly fees to remain in compliance. It also must have a Registered Agent, which is an individual or company designated to accept and process important correspondence for the company. As the owner of an LLC, you’re responsible for obtaining all necessary business licenses and permits.

An LLC is taxed the same way as a Sole Proprietorship unless members choose to be taxed as a Corporation. In that case, the company would pay corporate income taxes, and members would be taxed on distributions they receive, a method known as double taxation. There are advantages and disadvantages to both methods of taxation, and I’d advise you to consult a tax professional if you need help.

Although it’s not legally required, all LLCs should have an Operating Agreement, which is a document that describes how the business will operate based on the needs and wishes of its owners. An operating agreement describes how the LLC will be managed, what happens if one member leaves the company, how members will vote, how money is handled, how the business will be taxed, and many other situations that could affect the company and its owners.

Making the Case for an LLC

Imagine that you’ve been operating a food truck business as a Sole Proprietor for five or six years. After a rocky start and several very lean years, you’ve finally developed a dedicated following and are making some good money.

And then, on a Friday morning shortly before the lunch crowd is expected, the brakes on the truck fail, resulting in a crash that damages property and injures two people. Suddenly, you’re facing several lawsuits and all your years of hard work to build a business are in jeopardy because your personal assets are not protected.

If you had registered the business as an LLC and complied with all laws and regulations, your business assets may be threatened, but your personal assets, including your home, savings accounts, vehicles, and others, would be protected.

While liability protection is the primary argument I make for LLCs, it is not the only one. Other reasons to consider changing your Sole Proprietorship to an LLC include the following:

• An LLC inspires greater confidence with customers, lenders, suppliers, and others than a Sole Proprietorship.
• An LLC can get business credit that is not tied to personal accounts.
• Members of an LLC can choose how they want the business to be taxed.
• An LLC has greater opportunity for growth than a Sole Proprietorship, which cannot expand. without changing to a different type of business entity.
• Members of an LLC have the option to hire an outside manager or to have members manage the business.
• An LLC normally will find it easier than a Sole Proprietorship to raise capital, as many lenders are reluctant to loan to a business without a history of reliable income and savings.
• An LLC may be able to take advantage of local, state, or federal tax benefits.
• It’s typically easier for an LLC than a Sole Proprietorship to keep business finances separate from personal finances.

I understand that someone considering changing their Sole Proprietorship to an LLC may hesitate due to the need to file paperwork, pay fees, hire a Registered Agent, and take steps to remain in compliance with the state.  I argue, however, that the effort and expense is well worth the peace of mind that comes with knowing that your personal assets – those that you and any dependents you might have rely on – are protected.

Whether you may operate a business without a registered agent depends on your company’s business structure. Formally registered business entities (such as Limited Liability Companies and Corporations) must designate a registered agent on their formation documents and maintain registered agent services on an ongoing basis. Sole Proprietorships (and General Partnerships that have not converted to an LLP or another form of Partnership) are not required to have a registered agent because they do not file formation paperwork with the state and are not considered separate legal entities from their owners.

Entities may change their registered agent service provider, but they may not operate without a registered agent at any time. If an entity conducts business in multiple states, it must designate a registered agent in each of those states.

Even if a business is not required to appoint a registered agent, it can be valuable to have one for privacy and peace of mind. A registered agent is authorized to receive time-sensitive legal notices, government correspondence, and other official documents on behalf of your company. Because a registered agent must meet the state’s qualification criteria and maintain specific hours of availability, it helps ensure that official time-sensitive and confidential correspondence is received by a reliable, trustworthy party who will immediately deliver it to you.

Which Entity Types Must Designate a Registered Agent?

Generally, any legal business entity created by filing formation paperwork with the state must have a registered agent.

Examples include:

• Limited Liability Company (LLC) – Including those taxed as a Sole Proprietorship, Partnership, C Corporation, or S Corporation
• C Corporation – Including those taxed as an S Corporation
• Nonprofit Corporation
• Limited Partnership (LP)
• Limited Liability Partnership (LLP)
• Limited Liability Limited Partnership (LLLP)

What Happens If an Entity Doesn’t Appoint One?

If a business fails to designate or maintain a registered agent, it can experience serious legal, financial, and operational consequences.

Examples include:

• Legal proceedings moving forward without you because you did not receive important notifications and requests for response
• Public embarrassment and damage to reputation (Customers, employees, or guests might witness the delivery of “service of process,” like legal complaints or summonses, to your home or business address.)
• Loss of liability protection
• Missed filing deadlines because important notices got misplaced or accidentally thrown away
• State fines for noncompliance
• Loss of good standing status, preventing the business from operating in the state
• Fees to reinstate good standing
• Inability to qualify to conduct business in other states
• Administrative dissolution of the business entity

Who Should You Choose as Your Registered Agent Services Provider?

While many states allow a business owner to designate themselves, an employee, or another individual as their registered agent, there are downsides to that approach. Serving as your own registered agent or assigning that responsibility to a team member or another person adds another layer of responsibility that can potentially interrupt other duties. Additionally, it requires the designated person to be available at a specified address during specific hours of the day, Monday through Friday, to accept service of process and other documents on behalf of your company. Given that individuals need to take lunch breaks, go on vacation, take time off when ill, etc., they might not always be there to reliably accept correspondence.

Alternatively, a commercial registered agent specializes in handling critical correspondence, legal notices, and other official documents for business entities. With a physical mailing address of their own and the infrastructure and processes in place to reliably receive documents, they help ensure business owners retain their privacy and get critical notifications promptly. Moreover, they help monitor upcoming deadlines and inform their clients about new compliance responsibilities.

Learn More

Check out these other resources for everything you need to know about what a registered agent does and how to select one that will meet your needs.

• What Is a Registered Agent?
• Noncommercial Vs. Commercial Registered Agents
• How to Find and Compare Registered Agent Service Providers
• How to Appoint a Registered Agent
• Should I Be My Own Registered Agent?

A DBA, also referred to as Doing Business As, a fictitious name, or a trade name, is a name a business uses that’s different from the legal name of the company.

It’s common for an individual who wants to start a business as a Sole Proprietor to register a DBA instead of using their legal name as the business name. Doing so protects the privacy of the Sole Proprietor and creates a degree of professionalism for the business.

A Limited Liability Company (LLC) or a C Corporation might be registered with the state as one name but operate under a DBA that better describes its product or service offerings or is a more effective marketing tool than the registered name.

An important distinction to understand, however, is that a DBA is not a legal entity, like an LLC or C Corporation. It’s simply a name under which a business operates, not a business itself. For that reason, a DBA is not required to have an Employer Identification Number (EIN).

If you want to refresh your understanding about why DBAs are important and how to register one, you can check out CorpNet’s article “What Is a DBA?”

What’s an EIN and What Businesses Need One?

An EIN is a federal tax ID number issued by the Internal Revenue Service (IRS). It’s often described as a Social Security number for a business.

Common business structures include Sole Proprietorships, Partnerships, LLCs, and Corporations. The type of business structure you have determines how you pay taxes, what kind of management you’ll have, how profits are distributed, and other factors.

If your business is a Sole Proprietorship with no employees, you probably can use your Social Security number for tax purposes and won’t need an EIN, although your bank might require one if you want to open a business bank account. Many Sole Proprietorships use DBAs without having EINs.

Business structures other than Sole Proprietorships normally do need an EIN to set up a business bank account, hire employees, file tax returns, set up a payroll, and complete other tasks that require you to identify your business. It is the legal business, however, not the DBA that the business operates as, that needs the number.

How Is a DBA is Different from a Business?

The IRS, which is part of the federal government, operates under federal tax rules that specify what businesses need EINs. Because a DBA is simply the name under which a business is operating and not the business itself, it is not recognized by the IRS.

A DBA is registered with your state or local government and is of no concern to the IRS. The legal business that you register with the state, however, is of considerable concern to the IRS, which uses your EIN to identify the business for tax purposes.

When you apply for an EIN using the IRS Form SS-4, you are not asked to provide information about a DBA, only the type of business structure you have and other information that applies to the legal business.

A business such as an LLC or Corporation can have multiple DBAs used to market different product or service lines or differentiate branding for various areas of the company. For example, an LLC called Everything Tech, LLC might offer app development, consulting services, and web design. Because it wants clients to understand it offers multiple services, it obtains a different DBA for each service line.

While customers know the business by three different names, as far as the IRS is concerned, there is only one legal name – Everything Tech, LLC – under which three DBAs operate. There are some good reasons to create separate LLCs for separate business lines, but they have nothing to do with a DBA.

Wrapping Up

Obtaining an EIN is an important step when you’re starting up a business that’s registered with the state. It is not necessary for a DBA, however, because a DBA is a name and not a business, making it irrelevant to the IRS, the federal agency that issues EINs.

Starting a business is a task not to be taken lightly, as there is a lot to understand and a lot of misconceptions about what must be done. If you need advice or help setting up a Partnership, LLC, Corporation, or other business structure, CorpNet can help.

People often assume they will need a Social Security Number (SSN) to register an LLC with the state, but that is not necessarily true. There are identification requirements when registering a business, but an SSN is not always required.

Every state has laws pertaining to opening a business, so it’s important to check what your state requires. In most cases, however, you can register an LLC without an SSN.

The Role of a Social Security Number

The SSN was introduced in 1936 as a means of tracking income and providing retirement and disability benefits. All SSNs are issued by the Social Security Administration and have nine numbers

The role of the SSN has expanded over time, with the number becoming a primary source of personal identification. An SSN is often requested when opening a bank account, applying for credit, obtaining a credit card, and completing other transactions.

What to Use If You Don’t Have a Social Security Number

An SSN is a taxpayer identification number for an individual, while an Employer Identification Number (EIN) is a tax identification number for a business. If you don’t have an SSN because you’re not a resident of the United States or for another reason, you can apply for an EIN, which is issued by the Internal Revenue Service (IRS).

Also known as a Federal Tax Identification Number, an EIN is not required for obtaining an LLC registered with the state, but you’ll need one when opening a business bank account or for hiring and withholding taxes from employees. You’ll also be asked to supply it when filling out any application that requires you to identify your business.

You can apply for an EIN on your own or seek help from a business formation service. You’ll need to submit Form SS-4, Application for Employer Identification Number, to the IRS. The form requests information including the legal name of the business, its physical address, the type of business entity it is, and the reason you’re applying for an EIN.

The form also requests that you enter an SSN or an Individual Taxpayer Identification Number (ITIN), which is a number the IRS assigns to individuals who must report income but are not eligible for an SSN. If you need to file federal taxes and don’t have an SSN, you can apply for an ITIN using IRS Form W-7.

While it’s used primarily for tax filing purposes, an ITIN can sometimes also be used as a form of identification when opening a bank account or conducting other transactions. An ITIN is not a substitute for an EIN and not necessarily needed to obtain one. If you’re applying for an EIN and have neither an SSN nor an ITIN, you can simply write N/A on the line of the form that requests that information. You can’t apply online for an EIN if you don’t have an SSN, so you’ll have to mail or fax the form.

The Importance of a Registered Agent

Every state requires that an LLC has a registered agent, which is a person or company designated to receive important information such as legal documents and government correspondence. A registered agent must have a physical address within the state where the LLC is being formed.

Finding a qualified registered agent is especially important for a non-U.S. resident or someone else who does not have an SSN, as the person or company you hire should have the expertise necessary to handle business filings for clients using details about the business and an EIN.

Steps for Forming an LLC

Generally, the steps you’ll take to form an LLC and register with the state are the same with or without an SSN, but there are a few distinctions. Let me walk you through the process of forming an LLC.

1. Choose the state in which you want to register the business – This choice will depend on your circumstances and priorities, as some states have more business-friendly laws or offer increased privacy protection or greater tax advantages than others. Remember, though, if your business will primarily operate in one state, it’s normally recommended to form the LLC there.
2. Select a name and make sure it’s available – The name you choose for your business is important as it becomes the cornerstone of your brand. No two businesses registered within a state can have the same name, so you’ll have to do a search through your Secretary of State’s office to make sure the name you choose isn’t taken. Also, most states require the name of an LLC to include an LLC designation, meaning you’ll need to add some variation of “limited liability company” to your chosen name, such L.L.C. or Limited.
3. Choose a registered agent – As mentioned, every LLC must have a registered agent, who can be an individual or a commercial registered agent service. I recommend hiring a commercial service if you don’t have an SSN, as they are experts in handling the duties of an agent and working with clients with varying needs.
4. Create an Operating Agreement – While having an Operating Agreement is not normally required by the state, it is critical for your business as it provides a roadmap for how your LLC will be run. Even a single-member LLC, which is an LLC with just one person, should have one.
5. File your Articles of Organization – Articles of Organization are the official document filed with the state to form your LLC. You’ll need to include information such as the official name of your LLC, its physical address, the name of your registered agent, the management structure the business will have, and a statement of purpose for the business.
6. Obtain an EIN – As you’ve read, having an EIN is necessary for most businesses and is essential for tax purposes if you don’t have an SSN.
7. Open a business bank account – This would be traditionally done by using your EIN. If the bank requests an SSN, offer your ITIN if you have one, or choose a bank that is experienced in dealing with customers using alternative forms of identification.
8. Obtain necessary permits and business licenses – Depending on the type of business you have, you may need local, state, or federal licenses and permits. You’ll need to do some research to see what you need and how to keep your business in compliance with all regulations, including state and federal tax obligations.

Final Thoughts

Registering an LLC registered can be a daunting task, with or without an SSN. You’ll have to deal with paperwork and consider how you want the business to be taxed, what type of management structure you’ll employ, what vendors you’ll work with, whether you’ll have employees, and many other issues related to getting a business up and running.

If you’re feeling overwhelmed, concerned about not having an SSN, or confused about how to proceed, I highly recommend that you consult a professional or professionals who can provide sound advice and help you successfully form your LLC registered and your business underway.

As I’ve worked with entrepreneurs over the years, I’ve found that a particular point of confusion centers around whether a Limited Liability Company (LLC) is incorporated. Those looking to start a business often are confused about what it means to be incorporated and the differences between an LLC and a Corporation, which is a type of business entity that is incorporated.

An LLC is not incorporated and it’s not the same thing as a Corporation. Having said that, however, there are similarities between LLCs and Corporations. You’ll read more about LLCs and Corporations and how they operate, but first let’s look at exactly what is incorporation.

What Is a Corporation?

Incorporation is a legal process that enables an individual or group of people to form a company that is a separate legal entity from its owner or owners. The type of business formed through that process is called a Corporation.

Because a Corporation is a separate legal entity from its owners, the personal assets of owners are protected, and they are shielded from responsibility for debt and legal liability in the event of lawsuits. That limited liability is usually considered a major advantage of this type of business entity.

Another advantage of a Corporation is that it can raise capital by issuing shares of its stock. There are no restrictions on the number of shares a Corporation can have. A downside to this type of business entity is that there are more requirements and red tape involved with getting a Corporation up and running than with other types of businesses.

Forming a Corporation

Incorporation requires a business to register with a state as a legal entity. That involves drafting Articles of Incorporation, which provide information about the business. The amount of information required varies from state to state, but Articles of Incorporation normally include the following:

• The primary purpose of the company
• The official name of the business
• The total number of shares the business will issue
• What type of shares, such as common or preferred, will be offered
• The name and address of the company’s registered agent
• The names and addresses of the owners of the company
• The names and addresses of board members, if already determined
• If the company is being established for a definite or indefinite amount of time

Owners of the company will also have to pay a registration fee and obtain any licenses or permits they need to operate legally. Once a company has satisfied the requirements for incorporation, it is recognized by the state as a Corporation and is subject to the benefits and responsibilities of that type of business entity.

How Corporations Are Taxed

A Corporation is known as a C Corporation unless it meets certain IRS requirements that allows it to operate as an S Corporation. An S Corporation is not a business entity in its own right, it’s simply a Corporation that has a special tax status with the IRS.

An S Corporation is taxed very differently from a C Corporation in that S Corporations are subject to a pass-through method of taxation, which means owners report income and losses on their personal tax returns and pay taxes based on their individual tax brackets.

C Corporations, on the other hand, must pay corporate taxes on earnings before any profits can be distributed to owners, who are called shareholders. Those shareholders must then pay personal income taxes on their income.

This system is known as double taxation and is often considered a downside of Corporations, although shareholders often can take advantage of certain tax advantages to reduce the impact. Corporations also have some notable write-off advantages that can reduce taxable income.

Corporation Management

The shareholders of a Corporation elect a board of directors that is responsible for managing the business and affairs of the company. The board usually appoints a manager to run the day-to-day operations. This separates owners and management and protects the business from disruption if one or more shareholders sell their stock and exit the company.

What Is an LLC?

Like a Corporation, an LLC is registered with the state and is its own legal entity, separate from its owner or owners.  That means that, generally, owners are not personally liable for the actions of the company – only business assets would be at stake in the event of that the business is sued, or creditors are looking for repayment.

There is no limit to the number of owners – known as members – an LLC can have. A business with just one owner is called a single-member LLC, while one with more than one owner is called a multi-member LLC.

Forming an LLC

LLCs are fairly easy to set up and require relatively minimal work to keep in compliance. The state in which the business is based will require that you file paperwork and pay filing fees to get started. An important document for LLCs is its Articles of Organization, which are a public document providing relevant information about the business.

Similar to the Articles of Incorporation filed by a Corporation, Articles of Organization normally include the following information:

• The name of the LLC
• The purpose of the LLC
• The name and address of the registered agent
• How the LLC will be managed
• The mailing address of the business
• If the company plans to operate indefinitely or for a certain amount of time
• Names and signatures of all LLC members

To remain in compliance, an LLC must meet requirements such as filing annual reports, business license renewals, and paying franchise taxes, if applicable.

How LLCs Are Taxed

The owners of an LLC get to decide how the business is taxed. By default, an LLC is taxed as a pass-through entity – the same as an S Corporation, Sole Proprietorship or General Partnership. That means owners report income and expenses on their annual tax returns and pay taxes to the IRS based on their personal income rate. The same normally applies to state and local taxes.

While this is a simple way to pay taxes, LLC members are generally considered to be self-employed, meaning they must pay Social Security and Medicare taxes on their share of the profits. Known as self-employment taxes, the current rate is 15.3%.

LLC members can get around paying self-employment taxes, however, by having the business classified as a Corporation for tax purposes. This doesn’t mean the LLC has become a Corporation or is incorporated, it simply enables the LLC to be taxed the way a Corporation is taxed.

A word of caution, here. There are advantages and disadvantages to being taxed as either an LLC or a Corporation. If you’re ever in the position of having to decide how your business will be taxed, I’d strongly recommend that you consult a professional.

LLC Management

While the owner of a single-member LLC is automatically considered to be its manager, a multi-member LLC can choose to have members run the day-to-day operations of the business or hire a professional manager to run it for them.

Most LLCs choose to be member-managed, which gives members more control over how the business is run. If members don’t want to be involved in the daily business of the company or are unable to, however, hiring a manager can make sense.

Choosing Between an LLC and a Corporation

If you’re wondering whether you should structure your business as an LLC or incorporate it and operate as a Corporation, there are some key factors to consider:

• LLCs are generally easier to set up and manage than Corporations.
• LLC owners can decide whether they want the business to be taxed as a Sole Proprietorship or General Partnership or have it considered a Corporation for tax purposes.
• Members of an LLC that is taxed as a pass-through entity must pay self-employment taxes.
• Corporations, with the exception of S Corporations, are subject to double taxation.
• Corporations are able to have profits remain with the business and pay them out as dividends to shareholders.
• A Corporation also can issue shares of its stock to raise capital for expansion of the business.
• Both LLCs and Corporations offer liability protection for owners.

When deciding between an LLC and a Corporation, try to think long term and consider how large you envision growing your business, how much time you’re willing to put into making sure the business remains in compliance with all regulations, your preferences for how the business is taxed, and other issues that will affect how the company operates.

Take the time needed to understand the differences between a Corporation and an LLC, and the advantages and disadvantages that each type of business structure offers. And if you have questions or concerns when deciding what type of business is right for you, consult a professional for advice.

If you’ve been operating a business as a Limited Liability Company (LLC) and you’re thinking about converting to a nonprofit, there are certain steps you’ll need to take to accomplish that.

It varies depending on your state, but in many cases, you won’t be allowed to directly convert an LLC to a nonprofit. Instead, you’ll need to follow the rules of your state to dissolve the LLC and then start a new nonprofit organization. Some states, however, do permit a conversion, so I’ll tell you about that process, as well.

Before we take a deeper dive into changing your LLC to a nonprofit organization, however, let’s go over the basics of nonprofits and how they’re different than LLCs and other for-profit businesses.

Understanding the Basic Elements of a Nonprofit

People tend to lump nonprofits into a single category, but the truth is there are many varieties of this type of business entity operating in a wide swath of fields including health care, education, the arts, human services, religious, scientific, animal welfare, and others.

Some traits shared by all nonprofit organizations are that they are public entities that do not operate with the primary purpose of generating a profit. Any money they generate – known as surplus revenues – are reinvested back into their operations to support the mission of the organization.

Nonprofits don’t have owners but are governed by a board of directors responsible for making major decisions based on the organization’s stated purposes. An executive director normally is appointed to oversee day-to-day operations of a nonprofit.

A nonprofit organized at the state level is known as a Nonprofit Corporation. Registering at the state level may provide some benefits, such as exemptions from state sales tax, property tax, and income tax.

A Nonprofit Corporation does not automatically qualify for federal tax exemptions, though. To enjoy that status, a nonprofit must meet certain eligibility requirements under Section 501(c) of the IRS Tax Code.

The 501(c) tax category that’s most familiar to many people is 501(c)(3) status, as it covers the types of nonprofits most people know and contribute to. To receive a 501(c)(3) classification from the IRS, an organization must be considered “charitable” and be established for one of the following causes:

• Charitable
• Religious
• Educational
• Scientific
• Literary
• Testing for public safety
• Fostering of national or international amateur sports
• Prevention of cruelty to children or animals

A 501(c)(3) organization can be a charitable organization or a private foundation that is considered charitable. While charitable organizations typically are funded by members of the general public who support their goals, private foundations often receive financial support from a single source, such as a family or a Corporation. Private foundations normally distribute funds to other charitable organizations instead of operating programs themselves.

An organization that has 501(c)(3) status is exempt from paying federal taxes and is allowed to collect tax-deductible donations from individuals and businesses and receive grant money.

While 501(c)(3) is the most common tax status for nonprofits, the 501(c) designation has been widened over time to include entities other than charitable organizations and private foundations. The IRS has a long list of types of nonprofits that can qualify for some 501(c) designation, such as agricultural organizations that can enjoy 501(c)(5) status or business leagues that may be designated as 501(c)(6) organizations.

Before you consider changing your LLC to a nonprofit, I’d highly recommend that you do some research to see whether your organization meets, or would be able to meet, the qualifications for 501(c) status from the IRS.

Differences Between an LLC and a Nonprofit

While the primary purpose of a public nonprofit is to generate funds to reinvest back into their operations to support the mission of the organization, an LLC is a private company that operates for the purpose of generating a profit for its owner or owners, called members.

Nonprofits rely on grants, contributions, and fundraising for revenue, while LLCS generate revenue through sales of the goods or services it offers.

Unlike a nonprofit, the owners of an LLC get to decide how the company is managed, how it is taxed, and how it will be run, depending on the provisions of its Operating Agreement.

And while a nonprofit that meets specific criteria may qualify for tax-exempt status under U.S. law, the IRS is quick to tax profits generated by LLCs.

Those profits are by default subject to pass-through taxation, meaning they are passed through to the individual tax returns of owners, who pay taxes based on their individual tax rates. The business itself does not pay taxes unless it elects to be taxed as a Corporation, which is taxed at a corporate level with owners’ income also taxed at a personal level.

Why An LLC Might Want to Convert to a Nonprofit

There are a number of reasons why members might consider changing their business entity from an LLC to a nonprofit.

It’s not unusual for an entity to form as a for-profit business, only to have its owners realize months or years later that their mission is better suited to that of a nonprofit. They might conclude that operating as a nonprofit would enhance their credibility as an organization and generate good will among potential supporters.

Other business owners may be drawn to a nonprofit because of its potential for eligibility for federal and state income tax exemptions, or because they want to be able to apply for grants and attract donations from individuals and other businesses.

Like an LLC, a nonprofit organization provides limited liability protection to those associated with it, protecting them from personal liability if the organization can’t repay debt or in facing a lawsuit. And many founders of nonprofits appreciate knowing that the organization can be passed along to family members or other like-minded people who can continue their good work.

Whatever your reasons are for wanting to convert your LLC to a nonprofit, you also should be aware of some potential disadvantages of doing so.

Potential Downsides of Operating a Nonprofit

As I’ve mentioned, a nonprofit is governed by a board of directors that is responsible for important decisions regarding the organization and its assets. As founder of the nonprofit, you could end up having little say about its business operations.

While that might sound discouraging, it underscores the importance of carefully choosing people to serve as board members, making sure that their goals and values align with yours and other founders.

If you plan to operate as a 501(c)(3) organization, you’ll have to meet some very specific requirements to achieve that designation. As noted previously, any profits must be reinvested into the work and mission of the organization. You’ll need to confirm the ways in which you’re serving the public good and refrain from participating in certain political activities.

You also should be aware that nonprofits are held to high standards when it comes to legal and tax compliance issues. Organizations that enjoy tax-exempt status must be very diligent about meeting all the requirements necessary to maintain that status.

If you feel that your business is better suited to a nonprofit than an LLC or other for-profit business entity, however, it’s likely that you’re willing to deal with any potential downsides and move forward to achieve your mission and goals. Just be aware of all requirements and remain proactive about addressing them.

Two Options for Converting an LLC to a Nonprofit

As you read earlier, many states do not allow for the direct conversion of an LLC into a nonprofit, requiring you instead to dissolve the LLC and start a new business. You’ll need to do some research to determine the laws of your state and decide how to proceed.

If your state does allow for statutory conversion, you’ll simply file some paperwork to change the legal structure of the business. If you’re not able to convert it to a different legal structure, you’ll need to take some extra steps. Let’s have a look at each of these methods, starting with dissolving an LLC and registering a new nonprofit.

Option 1. Dissolve the LLC and Register a Nonprofit

If you must dissolve the LLC and restart it as a nonprofit by registering it with the state, there are actions you should take to assure the process is completed properly. In this section, I’ll walk you through some steps for dissolving a business as well as those for getting your nonprofit set up and registered.

Hopefully, your LLC’s Operating Agreement lays out the steps for its dissolution. If it does not, you’ll need to follow your state’s laws pertaining to LLCs.

Typically, the following steps are necessary when dissolving an LLC:

1. Hold a meeting for all members to vote on the dissolution, making sure that minutes are taken and the vote of each member recorded.
2. Following the vote, have each member sign a formal document acknowledging the dissolution.
3. Give each member a copy of the document and file the original in a safe place.
4. File Articles of Dissolution or a similar document with your state. Doing that signals that the LLC must cease all regular business and begin the process of winding up its affairs.
5. Begin winding up affairs by settling all business debts and paying any creditors, such as suppliers.
6. Close any bank accounts that aren’t needed to pay bills.
7. Pay all taxes owned and file final tax returns and reports.
8. Cancel all business licenses and permits.
9. Close out any assumed names you may have used for the LLC.
10. Withdraw the business from any states in which you were registered as a Foreign LLC.

Once you’ve dissolved the LLC, you can take steps to register your nonprofit with the state.

Before moving ahead with registering your nonprofit, take some time to review your ideas and plans to make sure they are viable and will allow you to move forward.

Start by assessing the needs of the community your nonprofit will serve. Get input from those who will be served by the nonprofit and from the individuals and businesses you hope will support it. Consider your startup and ongoing costs, anticipated income needs, possible sources of income, and other factors before committing substantial time and resources to a business launch.

Once you’ve determined the feasibility of the nonprofit, you’ll want to draft a mission statement that captures its purpose, who the organization will serve, and how. You’ll also want to get a good business plan in place to serve as a roadmap for your organization.

If you want to use your LLC’s name for the nonprofit, it’s likely you can do so as most states allow for names of dissolved businesses to be reused. If, however, you choose to retain the name of your business, make sure it reflects the purpose and goals of the nonprofit.

Key steps to register your new nonprofit:

1. Select the legal structure for your nonprofit. Depending on your state, you may be able to form the nonprofit as a Nonprofit Corporation, Nonprofit LLC, Unincorporated Nonprofit, or a trust. Most nonprofits register with the state as a Nonprofit Corporation and then apply for 501(c)(3) status from the IRS.
2. Recruit and appoint a board of directors, naming board members who share your goals and values. Most states require nonprofit organizations to have at least three members on their boards. Ideally, you’ll get board members in place early in the process of forming your nonprofit, as they are legally accountable for the incorporation of the organization.
3. Get your nonprofit bylaws in place that outline how the nonprofit will operate.
4. Obtain an Employer Identification Number (EIN) so you can open bank accounts in the name of the nonprofit. You EIN also will be tied to your tax-exempt status with the IRS.
5. File Articles of Incorporation with the Secretary of State’s office, paying any associated fees. If the nonprofit will have physical locations or a substantial presence in more than one state, it will need to be registered in each of those states, as well.
6. If you plan to accept donations or participate in fundraising activities, check with the state to see if Charitable Solicitation Registration is required. Nonprofits often complete this application when filing Articles of Incorporation.
7. Transfer any remaining assets of the LLC to the nonprofit, a step that may require the approval of the board of directors. Make sure to get a written agreement in place that states the details and terms of the transfer.

Once you’ve completed these steps, you can file with the IRS for 501(c)(3) or other 501(c) status.

Option 2. Convert Your LLC to a Nonprofit

If your state is one that allows for a statutory conversion, you could choose that route instead of dissolving the LLC and starting a new nonprofit. Statutory conversion is the most direct method of making that change.

To do so, you’ll need to file paperwork with your state detailing your reasons for wanting to convert your LLC to a nonprofit organization. Often called Articles of Conversion, the paperwork will include your nonprofit’s goals and mission and explain how LLC owners came to the decision to make the change. You also may have to provide financial information regarding taxes and debts owed by the LLC. If you need help filing Articles of Conversion, an expert at CorpNet can guide you through the process and answer all your questions.

If you’re going to apply for 501(c)(3) status with the IRS, you’ll have to change your LLC to a Corporation to satisfy the regulation that all 501(c)(3) organizations must be incorporated by filing Articles of Incorporation with your state.

Make sure you’ve satisfied all state requirements, such as appointing a registered agent and obtaining an EIN. You’ll need to create Corporate Bylaws and pay attention to identifying people to serve on your board of directors.

It’s important to understand all the requirements of your state and follow instructions for meeting them.  You’ll also need to apply for federal tax-exempt status from the IRS, which is a separate process from the state-level conversion.

Filing for 501(c)(3) Status With the IRS

Applying for 501(c)(3) status is one of the most important tasks you’ll undertake when starting a nonprofit organization, as you need the status (or another 501(c) status) to operate as a tax-exempt organization.

Having 501(c)(3) status also may enable an organization to claim income and property tax exemptions and provide access to grant money. Also, people donating to a 501(c)(3) organization may claim the donations as tax deductions, which can increase the likelihood of your organization attracting donors. While it’s possible your nonprofit is better suited for another 501(c) designation, for now we’ll focus on filing for 501(c)(3) status, as it’s the most common type of 501(c) organization.

While applying for this status occurs relatively late in the process of forming your nonprofit, you should be confident before doing so that you’ll be approved as a tax-exempt organization by the IRS. You can do this by making sure you meet the IRS regulations of operating with a specific purpose, whether it is educational, scientific, charitable, religious, or literary. You also must be  able to demonstrate that your organization was formed to serve the good of the public.

The IRS allows you to apply for 501(c)(3) status before incorporating the nonprofit, but most organizations wait until they’ve completed that process and have a board of directors in place, as it typically makes the process proceed more smoothly.

Apply using IRS Form 1023, or, for smaller organizations that meet certain criteria, Form 1023-EZ. The EZ form is more streamlined and has a lower application fee than the standard form. Both forms require you to provide detailed information about the purpose of your nonprofit, the activities it engages in, and who it serves.

You’ll need to prove that your mission is in line with IRS requirements and provide the names of your board members, along with key documents such as your Articles of Incorporation, Corporate bylaws, and a conflict-of-interest policy.

In addition to filing for tax exemption at the federal level, some states require you to register your nonprofit and apply for tax exemption at the state level. Check with your Secretary of State’s office to see if it’s necessary to do so in your state.

Once you’ve filed the application, the IRS will contact you if it needs additional information. If you’re approved, you’ll be notified by mail, but you can check on your application on the Tax Exempt Organization Search page of the IRS website. Applying for and obtaining 501(c)(3) status can be a cumbersome process. If you’re feeling overwhelmed by the task, a professional at CorpNet can help.

Keep Your Nonprofit in Compliance

As I mentioned earlier, nonprofits are held to high compliance standards by the government. You’ll need to make sure that you understand all state requirements that apply to your organization and be diligent about filing all the required paperwork. You’ll also need to maintain accurate records for tax purposes and make sure to file on time to avoid IRS scrutiny that could cause problems for your nonprofit. Most 501(c)(3) organizations must file IRS Form 990 every year, providing information about revenue, expenses, governance, liability, programs, and activities. You may also be required to file annual reports with your state.

Many nonprofit organizations hold events to raise awareness and generate funds, but it’s important to know what you must do to register for such events and how to secure the necessary licenses and permits. Look for state guidance and pay attention to any local regulations.

Forming and operating a nonprofit are noble causes, but as with any business, require a lot of effort and diligence to make sure the business is set up and operated properly. Changing a business from an LLC to a nonprofit adds another layer of complexity, so don’t hesitate to consult a professional if you need help.

Want to Learn More?

Below is a list of additional articles covering nonprofits:

• Nonprofit Corporation vs. 501(c)(3)
• Understanding the Various Types of Nonprofits
• How to Legally Start a Nonprofit Business
• Nonprofits: Making Your Mission Into Your Job
• What Is 501(c)(3) Status and How Do You Obtain It?