What Is a COI and Do I Need One?

Most startup founders register their business as a sole proprietorship: It is the choice picked by approximately 73% of all US companies. As your business evolves, though, you may find yourself wondering how to change a sole proprietorship to an LLC. You’re in the right place: This guide will teach you how to transfer from a sole proprietorship to LLC operations with ease and explain all the benefits associated with opening an LLC. Why Convert a Sole Proprietorship to an LLC? Before you change a sole proprietorship to an LLC, you should confirm that it is the most suitable solution for the future of your venture. The key incentives for opening an LLC are: Switching to an LLC separates your personal and business assets, which can deliver an extra layer of protection by removing personal liabilities Although this is not guaranteed, becoming an LLC can lower your tax bill without taking on some of the downsides of partnerships or corporations Turning from a sole proprietor to an LLC will allow you to implement a more fluid approach to management In many cases, LLC operations offer a nice midpoint between sole proprietorships and corporations. The personal benefits of limited liability can aid your financial situation and give you peace of mind, while securing an LLC operating agreement is a lot simpler than you might imagine. Can All Sole Proprietorships Become LLCs? Not all sole proprietors can’t switch to LLC registrations. Attorneys are perhaps the most common example, but other professionals can fall into this category as well. You must take this into account when considering a sole proprietorship vs. an LLC.  But even if your business can switch to an LLC, your sole proprietorship and LLC comparison should take into account some of the more attractive features of the former. Remaining a sole proprietor means you can avoid the LLC application process, and your ongoing legal matters will be minimal as long as you handle your accounts and taxes. Your business fees will be lower, too. On the other hand, it’ll be harder to get credit or sell the business at a later date. How Do You Change a Sole Proprietorship to an LLC? The time it takes to transfer from a sole proprietorship to an LLC is no longer than the time it would take to register a new company - about 14-21 days. The process of going from a sole proprietorship to an LLC can be completed by following these simple steps: Step 1: Consider outside support You don’t have to go through the procedure of opening an LLC alone. There are many professional LLC services that can guide you through the formation process to ensure that all compliance regulations are met.  Hiring an attorney to complete the bulk of the work is also an option, but it’ll cost a lot more than an online service.  Step 2: Check the intended business name As you look to transfer from a sole proprietorship to LLC formations, you must also check that the business name is available. Otherwise, you may step on another entrepreneurs’ intellectual property and find yourself facing many legal headaches. You can check the availability of your business name by calling your state’s secretary of state office. Some states also have an online database for a simplified process. If the company name has already been taken, you’ll need to think of another. While it may initially cause some frustration, you can turn it into a positive by rebranding. In addition to being unique, the name of your future LLC must meet your state’s LLC requirements. The naming elements can vary depending on your location but including “Limited Liability Company” or LLC in the name will be necessary. Step 3: Complete your articles of organization After confirming that the name of your LLC is available, you must think about how to change your sole proprietorship to an LLC from a legal standpoint. The paperwork needed is known as the articles of organization and must be completed before moving on with other steps. You will need to state the name and address of your LLC, along with its purpose. You must additionally confirm whether the company intends to be managed by its members or a manager. The most important part of this step, however, is to confirm your designated registered agent. This person will become the main point of contact for interactions with state authorities. You can also opt to become your own registered agent. Step 4: Complete an LLC operating agreement Completing an LLC operating agreement isn’t a requirement in all states, but you should be prepared for this additional step when looking to transfer from a sole proprietorship to an LLC. It’s a document that deals with voting rights, distribution of profits, and exit strategies when a member is ready to leave. In most cases, the document will cover a few sheets of A4. Having a formal document to detail how all these matters will be handled can be very useful, even when the state doesn’t require it. Step 5: Complete your IRS registration When registering your LLC with the IRS, you may operate as a corporation, partnership, or disregarded entity for tax purposes. A default classification will be provided but Form 8832 enables you to change this if required. Even if you hired employees as a sole proprietor, you’ll almost certainly need to register a new EIN number to reflect your LLC. Doing this will aid your payroll, tax filing, and accessing lines of business credit. When your IRS registration and EIN number are under control, you will almost be ready to operate as an LLC. Step 6: Apply for new business licenses and permits  When transitioning from a sole proprietor to an LLC, you may also be required to reapply for various permits and business licenses. In some cases, you simply need to inform the appropriate parties of your change. Once again, it’s best to contact your local state authority to determine what action (if any) is needed following the structural change. Professional licenses, reselling agreements, and all other local permits must be covered by this process. You must not start trading under your LLC before the entire process of getting new permits is finalized. Step 7: Find new business banking solutions While it’s not necessarily a legal requirement to change your business bank account, it’s usually the best option. At the very least, you’ll need to update the bank account details to show that the company is now an LLC.  There will be the added organizational demands of informing clients, but this shouldn’t be too problematic. Your business payments and bills can be switched across automatically, but you should keep the old account open for a few days to ensure all current payments and invoices clear before closure. On a similar note, you must inform insurance companies and other relevant parties about the change of legal entity. Final Thoughts on Registering an LLC Now that you know how to change sole proprietorship to LLC entities in a quick and convenient way, you should be able to make a calculated decision on whether it’s worth the fee of $50 to $500. If it is, the steps above will allow you to do it within days. 

If you’re like most small-business owners, you’ve probably heard the term “mergers and acquisitions” or the abbreviation “M&A” but don’t know exactly what it means.  In this comprehensive guide, we’ll break down everything you need to know about company acquisitions. We’ll start with an acquisition definition in business, then move on to the various types of these transactions and how to value a company. Finally, we’ll discuss the key players in mergers and acquisitions. By the end of this guide, you’ll be able to understand what M&As are and why they occur in the business world. What Is an Acquisition in Business? A business acquisition, by definition, occurs when one company purchases another company. The purchased company is known as the target, while the purchasing company is known as the acquirer or acquiring company. The main reason companies engage in a business acquisition is to grow their business further or neutralize competition. Acquisition, Takeover, or Merger: What’s the Difference? These terms are often used interchangeably, creating a fair share of confusion around the process. However, there are some key distinctions among them. An acquisition in business, by definition, occurs when one company purchases another company, and key employees, assets, and management of the acquired company typically become part of the acquiring company.  A takeover typically occurs in the same manner - a company purchases all or the controlling block of shares of another company. While it’s a synonym for acquisition, this term is often used in media to signify that the purchase was made in a hostile manner.  A merger deal is relatively rare. It occurs when two companies merge to form a new legal entity. For the term to apply, all the aspects of the deal - including which company’s management will be in charge, the changes in the value of both company’s stock, and the distribution of seats on the new board of directors - should reflect the fact that the two companies are true equals.  For example, if one company’s stock value is rising and the other company’s stock is losing value after the deal has been announced, it’s likely that the company whose shares drop in value is, in fact, the acquirer. What Types of Acquisitions Are There? There are many forms an acquisition may take, but they can generally be classified into two broad categories: friendly and hostile. Friendly Acquisition A friendly acquisition is one in which the target company agrees to be acquired by the acquiring firm. In most cases, the management of the target company will work with the acquirer to make the transition process as smooth as possible. That’s why, once the target firm agrees on the deal, the acquisition is typically completed without any major complications. Hostile Acquisition A hostile acquisition, also known as a hostile takeover, is one of the examples of acquisition in which the acquired company doesn’t want to be acquired by the acquirer. In a hostile acquisition, the acquirer will attempt to purchase the target company without the approval of its management. Typically, a larger company does this by purchasing a controlling block of a smaller company’s shares and therefore earns a controlling stake in the business.  This can often lead to a lengthy and complex battle between the two companies, as each tries to convince shareholders to support its position. Through the acquisition of stock, the acquiring company aims to limit the target company’s decision-making. Usually done by companies within the same industry, this has often been a key aspect of large companies’ growth strategy. Who Are the Key Players in an Acquisition? There are many players involved in the acquisition of companies. The most important are the target company, the acquirer, and the investment bankers. The target company is the company that is being acquired by the acquirer. The target company’s management will typically be heavily involved in negotiating the terms of the deal and ensuring that it is in the best interests of shareholders. The acquirer is the company that is purchasing the target company. The acquirer’s management will typically be responsible for negotiating the terms of the deal and conducting due diligence on the target. Investment bankers are the financial advisers to both the target and the acquirer in the process of acquisition in business. They will typically be responsible for helping to negotiate the terms of the deal and providing advice on financial matters. Acquisition deals are often reached after a complex and lengthy negotiation process. However, with the help of an experienced team of advisers, they can be completed successfully. Why Do Companies Acquire Other Businesses? There are many reasons for an acquisition. Most of them boil down to improving one’s business, sales, processes, or supply chain. To Maintain or Establish Monopoly on the Market An acquisition can be a way for a company to consolidate its position in an industry. For example, if there are only a few companies that manufacture a particular product, it might make sense for one of those companies to acquire the others to increase its market share. On the same note, acquisitions can also be motivated by a desire to reduce competition. For example, if two companies are competing for the same customers, one of them might decide that it would be more profitable to acquire the other and thus eliminate the competition. This is an example of an acquisition you’ll most likely hear about in the news. To Upgrade Current Processes and Obtain New Technology Another reason for company acquisitions is to obtain access to new technology, patents, or other assets that would be difficult or impossible to replicate. For example, starting a new supply chain or expanding into a foreign market might prove to be much more expensive for a parent company than purchasing a target firm that has its own supply chain. It Can Be a Good Investment In some cases, a company might decide to acquire another business simply because it’s a good investment. For example, if a company has excess cash and believes that another company is currently undervalued by the market, it might decide to purchase the target to make a profit when reselling it. Sometimes, companies will resell a company as a whole, other times, they may sell it in parts.  How To Value a Company for a Potential Acquisition To complete a business acquisition, the acquirer must first identify a target company. Once acquisition candidates have been identified, the acquirer will typically conduct due diligence to assess the value of the target companies and determine whether or not one of them is a good fit for the acquiring company. To value a company for a potential acquisition, the acquirer will typically conduct a financial analysis of the target designated for business acquisition, meaning: a review of the target’s financial statements, assets and liabilities, and an assessment of its competitive position and future prospects. Further Reading Selling a Business: A Checklist of the Crucial Factors You’ll Need To Consider Top 30 Small-Town Business Ideas for Success How To Own a Franchise: Simple Guide Wrapping Up Acquisitions can be complex processes involving business intelligence. If you’ve been thinking about acquiring a business or selling your company but don’t know where to start, take some time to explore the various types of deals available and how they might fit into your situation.

Any business planning to stay on top of its bookkeeping, accounting, and financial modeling, needs to account for its assets vs. its liabilities. Regardless of the type of business account you’re dealing with, these will be presented on your balance sheet. In this article, we take a deep dive to understand these core business components: What they mean, how they can impact a business, and what to consider before acquiring either. Assets From an accounting perspective, assets are defined as resources or goods a business, individual, or government owns that help generate revenue, add long-term benefits and value to the business, reduce expenditure, or increase its value. Anything with economic value for a company or the ability to increase an individual’s net worth, is an asset. Defining assets in accounting terms takes the element of control into consideration: Assets are also items or resources owners can sell or use to obtain something else of value. The three requirements something must satisfy to be classified as an asset are: It must be something a business or individual has control over. Said control must be given to that business or individual via past actions (e.g., building or constructing an item, an outright purchase, inheritance, etc.) It must have or be able to generate some economic benefit in the future. Some examples of assets are cash and cash equivalents, unpaid invoices, investments, equipment, patents and trademarks, property, etc. Liabilities From an accounting perspective, liabilities are obligations or payments a business or individual has yet to make good on. These may be monetary, or in the form of services yet to be rendered. A liability must have the following three elements: It must be a result of past events and transactions. It must present new obligations for the business or individual (e.g., wages owed to employees). There must be an outflow of valuable resources to settle the debt. All businesses have liabilities, except in peculiar cases where the company only receives and makes cash payments. Liabilities can include loans, salaries, accounts payable, sales taxes, unearned revenue, credit card bills, customer credit, etc. Asset Classification Assets are grouped based on their convertibility, physical existence, usage, and ownership. These classes are current and fixed/non-current assets, tangible and intangible assets, operating and non-operating assets, personal and business assets, fictitious assets, and investment assets. Current and Fixed/Non-Current Assets Current assets consist of funds and items or resources that can be quickly converted to cash (i.e., liquidity), typically within one year. They are also referred to as liquid or short-term assets, and include, but are not limited to, cash, cash equivalents, office supplies, short-term deposits, inventory, marketable securities, and unpaid invoices or accounts-receivable assets. Fixed/non-current assets provide long-term value but cannot be converted to cash as quickly and efficiently as current assets. They are also referred to as long-term assets and include, but are not limited to, patents, trademarks, land property, and heavy machinery and equipment. The value of fixed assets tends to depreciate over time and with use (e.g., cars). Tangible and Intangible Assets Tangible assets are physical in the sense that they can be seen, touched, or felt. These assets are also easy to convert to cash where it becomes necessary for a business or individual to do so. Some examples are vehicles, inventory, and office equipment. Not to be confused with fictitious assets, intangible assets are those assets that exist without the physical element, i.e., they cannot be seen or felt, but have economic value. They are also harder to convert to cash and include logos, copyright, patents, trademarks, etc. Operating and Non-Operating Assets Operating assets are those through which revenue is generated for daily business operations, for example, paying liabilities like wages owed. Such assets include cash, accounts receivable, inventory, and fixed assets. Non-operating assets generate value, but not for the daily operations of a business. In this category, you’ll find things like investment securities, unused equipment, land, or property, etc.  Personal and Business Assets As the name suggests, personal assets are those belonging to private individuals. They are controlled by their owner and do not fall under the company’s purview. On the other hand, business assets are owned by a company and cannot be used for private purposes. Decisions concerning the management of business assets need to be made by the company’s leadership, as these are meant to maintain the economic growth of the business. Fictitious Assets Fictitious assets, like intangible assets, lack a physical element; as their name suggests, they’re not real assets - instead, they’re cash expenditures than haven’t yet been accounted for, but are expected to generate revenue in the future. By definition, fictitious assets have an expiration date: Examples include discounts on shares, promotional and marketing costs, and preliminary costs. Investment Assets These are assets that have the primary purpose of generating a profit and boosting the investment portfolio of an individual or business. Examples of assets in this class are stocks, bonds, and currencies. Investment assets can either be growth assets or defensive assets. Growth assets are those with high potential to bring bigger short-term gains (e.g., property and volatile stocks), while defensive assets provide smaller, but stable, revenue (e.g., debt securities and savings accounts). The Importance of Asset Classification Classifying assets based on their convertibility, physical existence, usage, and ownership is not merely a matter of convenience or unnecessary accounting terms. Understanding the nature of an asset helps business owners and private individuals determine what assets to invest in. For example, knowing the difference between operating and non-operating assets paints a clearer picture of how they contribute to a business’s revenue. The solvency of current and fixed assets must be considered before acquisition in case of inevitable situations that rely on liquidity. When assets are acquired without proper consideration, they can become current or long-term liabilities without warning. Liability Classification Liabilities can be current or short-term, non-current or long-term, and contingent liabilities. Current or Short-Term Liabilities These are debts or obligations due to be paid within a year. Current liabilities come in the form of accounts, bills, and interest payable, bank account overdrafts, short-term loans, accrued expenses, customer credit, customer prepayments, wages and taxes owed, etc. and can be monitored using accounting software. Non-Current or Long-Term Liabilities Long-term liabilities are due to be paid in over a year. Just like current liabilities, they should be closely monitored because they factor into long-term solvency.  These liabilities include, but are not limited to, long-term loans, employee benefits, bonds payable, deferred tax liabilities, capital leases, mortgage payable, leases, long-term accounts payable, deferred revenue income, etc. Contingent Liabilities Contingent liabilities depend on the outcome of an ongoing or anticipated event. These liabilities are generally not recorded until the expected event's probability surpasses 50%. When registered, the liability amount is estimated, not fixed. The primary examples here are lawsuit costs and product warranties. The Importance of Liability Classification Knowing which category liabilities belong to helps entities keep track of their implications: The repayment terms on current and non-current liabilities are essential for creating payment plans in line with their expiry dates. Knowing which category they belong to deters accruing too many liabilities in any one of them. For example, having multiple concurrent long-term loans could easily become overwhelming. Relationship and Differences Between Assets and Liabilities Assets and liabilities coexist and complement each other. Here’s how: Liabilities are often used for purchasing necessary assets (e.g., taking out a loan to buy equipment). Assets generate revenue that will later be used to pay off liabilities, maintaining healthy cash flow. A healthy assets vs. liabilities ratio ensures that liabilities do not outweigh the assets used to pay for them. The more assets you have compared to liabilities, the faster your profit will grow.  Assets are more prone to depreciation than liabilities. Liabilities are generally described as non-depreciable. On the balance sheet, assets appear on the right, while liabilities appear on the left. Asset Benefits As much as they have been established in the previous paragraphs, the benefits of different assets cannot be overemphasized: Owning tangible assets instead of renting them helps save costs in the long run; it also gives you the option to rent them out to others. However, some tangible assets (e.g., machinery) tend to depreciate over time. Intellectual property assets protect their owner from third-party infringement and generate revenue from licensing and transferring those rights. A healthy assets vs. liabilities ratio ensures adequate cash flow. Company culture is an intangible asset that is often overlooked, but it converts to employee retention, and, in turn, revenue generation by minimizing hiring costs and maximizing employee experience. Real estate is the most viable category of assets an individual or business can own, as it appreciates over time and can be liquidated relatively quickly. Assets often outlive their owners and can be part of their estate. Assets contribute positively to the valuation of a business. Liability Benefits In a discourse addressing assets and liabilities, it might seem a bit strange to attribute benefits to liabilities, but the word does not connote only negativity. Some of the merits of liabilities are: Loans increase short-term liquidity, adding value to a business. Liabilities keep businesses and individuals on their toes and aid financial growth, due to the fear of running into solvency issues. Assets vs. Liabilities vs. Equity Equity represents the amount a business is worth once it’s liquidated and all its debts are paid. The equity needs to be positive - if the figure is negative, the liabilities have outweighed the assets, and the business is at risk. The basic accounting equation for the calculation of the equity or net worth of a business is: Total assets - Total liabilities = Equity When a business can pay out its liabilities, the remainder of its assets is referred to as stockholders' equity. The state of equity provides some insight into how the finances of a business have progressed or failed, and the anticipated growth rate and pattern. An increase in equity can result from increased revenue, stock sales, and the addition of capital by shareholders, while a decrease can be due to depreciation in the value of assets and an increase in liabilities. Assets vs. Liabilities: General Terms This section addresses terms related to both assets and liabilities Valuation Valuation is the process of determining what a business would be worth if sold. Valuation may be done on the business as a whole or assets alone. The three major approaches to valuation are the cost, market, and discounted cash flow approach. Asset valuation is a process a business undertakes to determine the value of all the assets it owns. The valuation of its assets can be used for restructuring purposes, audits, or loan applications. Assets can be categorized into tangible and intangible assets for convenience. For tangible assets, valuation methods include the cost, standard cost, market value, and base stock method. The term used to describe asset or liability value is “fair market value,” and it can be both current or projected. Accruals Accruals represent the income and expenditures that have not yet been executed. Basically, it’s what the business owes or is owed that has not been inputted in any financial statements. What falls under accruals will largely depend on the accounting period. For example, machinery repairs can be accounted for at the end of the financial year.