So, you’ve finally realized that it’s time to turn your side hobby into a legal business entity?
Or perhaps, you’ve realized that your personal assets are at high risk with Sole Proprietorship?
Maybe a new client only wants to deal with a business entity like an LLC?
Well, there can be several reasons for you to formalize your business by converting into an LLC. After all, a Sole Proprietorship is not a business entity. It is just you operating your business yourself.
But guess what, technically there is no way of converting a Sole Proprietorship into an LLC.
Does that mean someone operating as a Sole Proprietorship cannot change it to an LLC?
Well, the only solution is first to stop using your Sole Proprietorship and then form an entirely new LLC. In other words, changing your Sole Proprietorship into an LLC is almost similar to starting an entirely new business.
Fortunately, the whole process is not as complex or expensive as you’d imagine. On top of it, the way you operate your business won’t quite change much. As an LLC, you’ll also have a layer of protection for your personal assets.
Unlike Sole Proprietorship where the business owner and the business are a single entity, LLC puts the much-needed separation between the two. Even when it comes to taxation, you’ll have increased flexibility as an LLC. The conversion can also help change your business perception, encouraging you to grow it further.
So, let us now have a detailed look at what you need to do to change your Sole Proprietorship to an LLC.
Start with the Business Name
Irrespective of whether you’ve been running your Sole Proprietorship under your name or DBA/Fictitious Name, you’ll need a new name for your LLC. This is because it is very much possible that the name under which you’re running your Sole Proprietorship might already be registered as an LLC in your state.
The best way to check for business name availability is to refer our 50-State Business Entity search guide.
Alternatively, get in touch with the state secretary’s office to know whether or not the name you have for your LLC is already registered. Most of the states now have online databases of registered names. After finalizing a name that is not used by any other business in your state, make sure that the name does not infringe anyone’s trademark.
Check the patent and trademark office’s database online to search for trademarks with the same name. Your new business should have “Limited Liability Company” in the name. There are also abbreviations like “Liability Co”, “Ltd”, and “LLC” that you can use. You can also consult a legal professional to finalize the name.
In most states, you’re not required to reserve your LLC name beforehand. The registration is done automatically when the paperwork for forming LLC is filed. However, the rules differ in a few states.
Filing Articles of Organization
The articles of organization are the documents that outline the initial statements needed to form an LLC. You have to fill out the forms and submit the same to the filing office of your state. The requirements for filing vary between states.
It is just a simple document which outlines the basic details of your business, like the name of the LLC, name of the owner/s, address, etc. There is a fee for submitting this document.
Moreover, in most of the states, you’ll also need a “registered agent” for receiving legal documents. In case of a single-member LLC, you’ll be that registered agent. For multi-member LLCs, the owners need to select one owner as the registered agent.
Writing the Operating Agreement of Your LLC
It is through the operating agreement that the operations and ownership rules are defined. In other words, it maps out your entire business process. It has details like the responsibilities and rights of the owner/s, sharing of profits and losses, and voting power.
LLCs are not required to submit their operating agreement to any legal organization or the government. However, it is highly recommended that multi-member LLCs create the operating agreement as it reduces the chances of conflicts between LLC owners.
Applying for a Bank Account for Your LLC and Announcing the LLC
With LLC, you have a business entity separate from the owner. This separate business entity has the right to open bank accounts and purchase properties. While it was not compulsory to have a separate business account when you were running a Sole Proprietorship, you’ll need one for an LLC.
The bank account for your LLC makes it easier for you to keep your personal funds separated from the business funds. It also enables you to keep your personal assets protected, report taxes, and keep records.
Some of the states also require you to announce your LLC. This is done by publishing the announcement in any local newspaper. In some states, you also need to send written proof of the same to the filing office.
Applying for Business Permits and Licenses
Once all of this is done, it’s time for you to register for business permits and licenses. Depending on the type of business you want to run, there can be many different permits and licenses that you might require in different states. Check with the LLC filing office to know more about the permits and licenses that apply to your business.
Apart from this, you’ll also need to either transfer your EIN (Employer Identification Number) from Sole Proprietorship to LLC or apply for a new EIN. The transfer of EIN from Sole Proprietorship to LLC is only possible if you are a single-member LLC and meet the following requirements-
- You want the LLC to be taxed as a Sole Proprietorship/Disregarded Entity
- You don’t want the LLC to be taxed as a C-Corp or S-Corp
- There are no employees in your LLC
- Your LLC is not liable for excise tax or employee tax
If you do meet these requirements, you can send a request letter to the IRS for transferring your EIN from Sole Proprietorship to LLC. In all the other cases, you’ll need a new EIN.
Moving from Sole Proprietorship to LLC can help you get a host of benefits with the biggest being the separation it puts between you and your business. The whole process is simple and inexpensive, making it an excellent choice for any Sole Proprietorship owner serious about his/her business and personal asset protection.
If all of this seems complicated, you can also hire legal help to get you through the process. If everything moves in order, it should not take more than 15-20 business days to change your Sole Proprietorship into an LLC.