How To Change a Sole Proprietorship to an LLC in 7 Easy Steps
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.
Switching from a sole proprietorship to an LLC does take two to three weeks but is a lot easier than you might think. And with the support of an appropriate LLC formation service, you’ll be able to avoid any mistakes and delays.
Yes, you do. Even if you have an employer identification number as a sole proprietor, most business structure changes will require you to get a new EIN before filing taxes or managing payroll matters.
The main advantage of becoming an LLC is that you’ll protect your personal assets. So, if you get sued, your home or other assets won’t be at risk. It creates more flexible management and may also lower your tax bill.
There is no single right or wrong answer. However, if you’ve looked at the benefits of becoming an LLC or want to access extra business funding, an LLC may be the way to go. If you’re still unsure, contact an agent or advisor for support.
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