Converting to LLC?

Question

I'm trying to convert my part time sole proprietor business to a LLC.
1) Everyone talks about how great Delware is for incorporating. But how does that affect, if I do most to all of my business in another state? Do I have to register my LLC with the state that I'm working in? Do I cancel my business license with the state that I am currently working in and stop paying taxes to this state once I'm LLC'd?

2) How will the tax conversion work? Does all my income from 1/1/06 to the incorporation date be taxed as sole proprietor on my 1040 and then the rest of the years income be taxed as a corporation?

3) Is it usually more tax or less tax for a LLC than Sole Proprietor?

Thanks

Answer 1

First of all, there has to be reason for the conversion. Is there? Has it been discussed with a competent attorney and your accountant?

Regardless of where you register you LLC, you pay taxes where you physically live. If you choose to form your LLC in Delaware, you will have to qualify to do business in your home state (essentially, pay the same fees as you would if you incorporated there), so you will be paying two sets of registration fees, one to Deleware for actual incorporation, the other to your home state for qualification. Most of the time, the additional cost is not worth the additional trouble, so I'd say, don't waste effort by forming the LLC in Delaware and do it in your home state. There are legitimate reasons for incorporating in Delaware, but they are most relevant to larger concerns with many shareholders.

Tax conversion... You will need to file separate tax returns for the LLC; particulars will depend on whether you choose to pay taxes as a corporation or as a partnership. Discuss this with your accountant.