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
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 proprietor or part proprietor 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.
You'll find more information on LLC Tax Advantages and LLC Tax Deductions on Taxcafe.com