Can You Change a Sole Proprietorship To An LLC
Yes, It is possible to convert a sole proprietorship to a limited liability company (LLC), if you are currently running a sole proprietorship. As a business entity, LLCs offer greater protection, tax advantages, and other advantages.
This simple question reflects a deeper concern about when changing from a sole proprietorship to an LLC might be necessary. Furthermore, you might want to know how to convert a sole proprietorship to an LLC and what your new responsibilities are as an LLC owner.
Why Change a Sole Proprietorship to an LLC
The decision to change from a sole proprietorship to an LLC can seem complicated. Check out these key points on each business structure to help you decide.
Sole proprietorships are…
- One person owns the business
- Easy to form and affordable
- A legal entity that has the same legal status as the owner
As a sole proprietor, you are personally responsible for all business losses, debts, and liabilities.
Limited liability companies (LLCs) are…
- Owned by one or more individuals (called members)
- Generally easy and affordable to form (in most states)
- A different legal entity from the owners
Unlike corporations, LLCs combine aspects of partnerships and corporations. As an LLC separates business and personal liabilities, your assets are protected and owners are not liable for business debts. Partners are also responsible for sharing their tax burden.
The transition from a sole proprietorship to a limited liability company can seem daunting at first. However, as your operation grows and you need more separation between your personal and business matters, it becomes a concern.
How to Convert a Sole Proprietorship To An LLC
The process of changing your business’s legal structure from a sole proprietorship to a limited liability company will take some time. You can use this checklist to guide you through the process, and you can work through each step in order.
1. Double-Check Your Business Name
Converting a sole proprietorship to an LLC requires a unique business name. It is possible that another LLC already has your business name. This means that even if you used the name as a sole proprietor, you could not use it as an LLC.
Consult your state’s secretary of state to see if the name is available. Most states maintain a business name database online. If no one in your state uses your business name, make sure it does not conflict with anyone’s trademark. To search trademarks, use the U.S. Patent and Trademark Office’s database.
Your business name must include “Limited Liability Company.”. You may also use an abbreviation like “LLC,” “Ltd.”, or “Ltd Co.”.
In most cases, LLC names do not need to be registered. A name is registered automatically when the paperwork for forming an LLC is filed. Rules vary by state, so check with yours.
2. Choose a Registered Agent
Your registered agent will serve as the LLC’s main point of contact with state agencies and other law enforcement. Your attorney can act as your agent or you can act as your own agent.
3. Submit Your Articles of Incorporation to the State Government
Your state office will then require you to file certain documents, known as Articles of Organization. You’ll need to provide information such as:
- Name and address of your LLC
- The purpose of your LLC.
- Name and address of your registered agent (the person who receives official LLC documents).
- How will your LLC be managed: will it be managed by members or by managers?
4. Create an LLC operating agreement
LLC operating agreements specify who owns and operates the LLC. This document outlines how the LLC will be run. An operating agreement outlines the responsibilities and rights of LLC members, voting rights, and profit splits.
No government or legal organization requires you to submit an operating agreement. In case you have more than one member, it is better to create one. It reduces conflict between members.
5. Getting an EIN
An Employer Identification Number (EIN) is a number assigned to businesses by the IRS to identify them and tax them. It is essentially a company’s social security number.
Applying directly to the IRS for an EIN is free. Follow the instructions in our EIN guide to getting your free EIN. The IRS requires you to apply for a new Employer Identification Number (EIN) even if your sole proprietorship already has an EIN.
6. Introducing Your LLC
If you intend to form an LLC, some states require you to publish a public notice. For instance, you can place an ad in your local paper. You may need to publish the notice several times and provide written proof to the LLC filing office. For specific requirements, check with your state.
7. Open a New Bank Account
By forming an LLC, you create a new legal entity. A business is allowed to open a bank account and own property just like an individual.
You can separate personal and business funds by opening a bank account under the name of the LLC. It is important to have a separate business account so that you can keep records and file taxes.
8. Get New Licenses and Permits For Your Business
Your LLC needs new business licenses and permits. Find out what licenses and permits your business needs by checking with your state. In addition to a business license, you may need a seller’s permit and zoning permit to do business.
With our LLC Formation guides, you can follow detailed instructions for every step of setting up your LLC, from naming it to applying for an EIN.
Congratulations on taking this important step toward building a solid foundation for your new business. Good luck!
FAQs:
Yes, it is possible to convert a sole proprietorship into an LLC. This process is commonly known as “converting” or “transferring” the business structure.
Converting to an LLC can provide several benefits, such as personal liability protection, separation of personal and business assets, and potential tax advantages. It can also enhance your business’s credibility and professionalism.
The exact steps may vary depending on your jurisdiction, but typically involve filing the necessary paperwork, such as Articles of Organization, with the appropriate state agency. You may also need to obtain a new Employer Identification Number (EIN) for the LLC.
It is important to consult with a legal or financial professional to understand the implications of converting your business structure. This may include potential tax consequences, changes in liability, and compliance with local regulations.
Generally, assets and liabilities of a sole proprietorship can be transferred to the new LLC, but it is important to ensure proper documentation and compliance with any legal requirements or contracts involved. Consulting with a professional can help ensure a smooth transition.
