Start Your U.S. Business Confidently

Show Me How
50% Complete

Step 1 of 2: Start Your Application

Privacy Policy: Your information is 100% safe and secure

How to Convert Sole Proprietorship to LLC (& Why You Should in 2019!)

Convert Sole Proprietorship to LLC

If you started your business as a sole proprietorship, it’s time to start thinking about changing to an LLC.

Naturally, there are a lot of questions that come with changing sole proprietorship to an LLC.

“How do you change sole proprietorship to an LLC?”

“What are the benefits of changing sole proprietorship to LLC?”

In this article I will discuss the advantages of an LLC and how to change your sole proprietorship to an LLC in order to get personal liability protection.

The #1 reason to form an LLC is for personal liability protection. By forming an LLC you create a “protective wall” between your business assets and your personal assets so if your business is sued then your personal assets (like your personal bank account, home, cars, properties, investments or anything that you personally own) will be safe and secure as they will not be considered a part of the business. If you don’t form an LLC, your personal assets will be at MAJOR risk if your business get sued.

You owe it to yourself to understand the differences between sole proprietorship and LLC and change to an LLC as soon as possible.

If you’re looking to protect your personal assets and form an LLC, email me at sam@mollaeilaw.com to take the first step.

 

Difference Between LLC and Sole Proprietorship

For starters, it is important to remember that when you operated your business as a sole proprietorship you and your business are a single entity. You blend together as one being.

Sole Proprietorship is the simplest business type and it does not require any formal filings. You’re automatically considered to be a sole proprietorship if you do business activities but don’t register as any other kind of business.

The biggest disadvantage of a Sole Proprietorship and the reason why you should NOT start your business as a Sole Proprietorship is that you take personal liability for all business matters. What this means is that you will be held personally liable for the business’s debts and obligations as a Sole Proprietorship. So if your business gets sued or if something happens to your business as a sole proprietorship, then you will be personally responsible for your business (which you definitely don’t want to do).

The big issue with being a sole proprietorship when you go into business is that lack of separation between you and a business and you as a person. There is no line between your business assets and your personal assets.

The problem with this lack of separation is if someone sues you as a business – and wins – they can take your personal assets as well as your business assets. Nothing you own is safe when you function as a sole proprietorship.

This alone is the biggest downside to being a sole proprietorship and ultimately why you should learn how to change to an LLC.

 

Benefits of Changing from Sole Proprietorship to LLC

Changing to an LLC is a real game changer for entrepreneurs. When you change your business to an LLC, you create a new legal person.

This person is a separate being from you. This is a new legal being that has the same rights as you.

For example, an LLC can own real estate or opening bank accounts. An LLC offers that clear separation between what is yours and what belongs to the business that sole proprietorship will never offer you.

One of the key benefits to converting to an LLC is you now have a separate person to take any liability hits you endure when you go into business.

Still confused? Here’s a closer look at some of the differences between LLC and sole proprietorship:

  • When you do business as a sole proprietorship, you – as a person – are open to devastating law suits. An LLC protects you from this.
  • An LLC offers tax advantages as you can structure your business differently
  • As a different legal being, an LLC requires its own tax ID number and paperwork. So, if you had an EIN as a sole proprietorship, you will need a new one when you change to an LLC.
  • More than one person – referred to as members – can own an LLC. A sole proprietorship can only have a single owner.

 

Can You Change a Sole Proprietorship to an LLC?

Once you start to learn about the benefits of operating as an LLC, a sole proprietorship doesn’t make sense in most cases. The lack of protection to your personal assets is often the biggest reason why people steer clear of sole proprietorship.

Fortunately, every state allows you to change a sole proprietorship to an LLC. You just need to connect the Secretary of State to request the proper paperwork to proceed with the conversion.

If you want to make sure the conversion goes smoothly, I highly recommend reading out to an experienced lawyer such as myself at sam@mollaeilaw.com. An experienced lawyer can help you with the paperwork to make sure everything is handled the right way.

When you change from a sole proprietorship to an LLC, it is important to maintain your “corporate veil.” Basically, this means you have to keep your personal assets and business assets separated.

It is equally important for you to keep credit cards, bank accounts, and loans separate from your personal financials. Avoid the temptation to use your LLC as a personal checking account or ATM.

 

Will Changing to an LLC Help You Dodge Personal Taxation?

You can’t change your sole proprietorship to an LLC to dodge personal taxation issues. Converting to an LLC won’t help you avoid paying loans nor will it protect you from a crime.

 

Would Changing to a Corporation or LLC Be the Better Choice?

As a small business owner, you will face the challenging decision of whether to incorporate your business. To decide what is best for your business you need to understand the differences between the different types of business entities and the benefits they offer you.

 

How Establishing a Business Entity and Forming a Business Works

In almost all cases, you start a business as a sole proprietorship. This is usually because you aren’t really planning a business.

If you are just starting out selling a product or a service, sole proprietorship makes sense. There’s no reason to go through the effort of forming an LLC or a corporation if you don’t know whether your business idea is viable.

So, you test the waters as a sole proprietorship and change when you decide the business is a success.

The key is to make sure you change to an LLC or a corporation because operating a successful business as a sole proprietorship is extremely risk.

All it takes is one angry customer to file a lawsuit – and win – and you could lose your home, vehicles, and the money in your savings account.

Imagine you write a software and put it onto the market as a shareware. Low risk and harmless business venture, right?

Now, imagine you distribute a virus with that shareware that destroys people’s hard drives. Suddenly, you become liable for all that lost data with your “low risk” business venture.

The same concept can be applied to making a homemade treat and selling it at the local farmer’s market. It is a harmless, low-risk, and easy business venture until someone gets sick and blames your food.

Before you know it your low-risk business venture buries you in lawsuits and paperwork.

The reason you convert your business from a sole proprietorship to an LLC – or a corporation – is to protect yourself from these scenarios.

 

What Is a Sole Proprietorship?

When you form a sole proprietorship, there is no difference between you as a person and you as a business owner. This is beneficial in the tax department because you don’t have to deal with corporate taxes.

Forming a sole proprietorship does offer some benefits – easy tax returns, simple paperwork, and fewer regulations.

You make a profit? The profit is yours to keep.

Unfortunately, the lawsuits and legal issues are all yours to keep as well. That is why you should never remain as a sole proprietorship once your business starts doing well.

 

What is a Corporation?

A corporation offers that separation between yourself as a business and yourself as a person. It is just what you need to protect your personal assets from legal issues.

If you don’t like the idea of multiple people managing your business, that isn’t an issue as a corporation can be owned by a single person – or multiple people.

If you manage a small business, you should look into forming a S Corporation. It is almost always the best option for a small business as it offers some tax advantages.

If your business is growing quickly or you are interested in stock, you will need to form a C Corporation instead.

 

How is LLC Different From a Corporation?

An LLC, like a corporation, makes your business a separate entity and protects your personal assets. Hearing this can make trying to determine how corporations differ from sole proprietorships to be a little confusing.

An LLC offers a lot more flexibility in how profits can be distributed among the members (owners) than a corporation business structure can. LLCs can also avoid corporate taxes in most states.

 

What Are the Benefits of Incorporating Your Business?

Incorporating your business is an easy way for you to separate your personal and business assets. If your company endures a lawsuit or files bankruptcy, you would not have to worry about your personal assets.

Forming an LLC does offer a lot of the same benefits in regard to personal liability protection.

Forming a corporation can also save you money when it comes to taxes. The savings really adds up for companies turning a large profit.

 

When to Covert LLC or Corporation

After learning about the differences between an LLC, corporation, and sole proprietorship and the benefits each entity offers you, deciding to convert is a given. The question then becomes – when do you convert?

Because a corporation or an LLC protects your personal assets in ways sole proprietorship does not, the consensus is “as soon as possible.” This, however, is not true 100 percent of the time.

 

So, when is the Best Time to Change Your Sole Proprietorship to LLC?

If it is close to the end of the year – for tax reasons – it makes more sense to wait until you roll over into the new year.

Why? If you operate your business as both a sole proprietorship and an LLC (or a corporation) in the same year, you will be required to file two different tax returns.

So, you’ll end up paying more for tax preparation than you would if you just waited until the start of the new year to change.

Save yourself some money and contact me at sam@mollaeilaw.com when you decide you want to change from sole proprietorship to an LLC. I can help you with both the paperwork and the timing.

 

There is No Perfect Solution for Every Business

Whether it is best for you to incorporate or form an LLC really depends on what type of business you have, what type of owners, your financial situation, and what growth plans you have for the business.

If you plan to deal with stocks and shares, corporation is the better entity.

Because there is no single right solution that works for every business, the best thing you can do for yourself is reach out to an expert – such as myself at sam@mollaeilaw.com. I can look at your business plans and assess the best plans for you moving forward.

 

Here’s How to Convert from Sole Proprietor to LLC

Now that you understand the differences and benefits between sole proprietorship vs. LLC, there is only one thing left you have to worry about. How do you make the change?

To do so, you just need to follow these simple steps. Just make sure you time it at the beginning of the year to avoid the headache of two tax returns.

 

Lock in Your Business Name

When you convert from sole proprietorship to LLC, you must make sure your business name is unique. You cannot operate as an LLC with a name another LLC is using.

Even if you used a name as a sole proprietorship, you may have to change it if the name is not available when you convert to an LLC.

 

How Do You Know If Your Name is Available?

The easiest way to determine if your business name is free is to call your Secretary of State office and ask. Most states also have online databases you can check for registered business names.

You can even get a legal professional to help you with locking in your business name for your LLC.

After making sure the name is free, you need to be sure you are not infringing on anyone’s trademark. To do that, you just need to search your business name using the United States Patent and Trademark Office’s database.

Remember your business name must include “Limited Liability Company.” You, however, can use an abbreviation such as “LLC,” “Ltd,” or “Liability Co.”

Whatever you choose you just have to make sure you make it clear your business is an LLC in the name.

Typically, you do not need to register your LLC business name. Your business name is automatically registered with the state when you file the necessary documentations to form an LLC

Just remember rules regarding forming an LLC or converting from a sole proprietorship to an LLC do differ from one state to the next.

 

You Must File Articles of Organization to Form an LLC

To form your LLC, you need to fill out the official documentation and send it in to your state’s filing office. Every state has different requirements you must meet for your articles of organization.

Basically, this is just simple documentation that outlines your business. Articles of organization can include the following information:

  • Your LLC name
  • Your LLC address
  • Any owner names

You will be required to pay a fee to submit your articles of organization. While the fee is never too expensive it does vary from one state to the next.

 

Other Steps You Must Take to Legally Form an LLC

  1. Write up an LLC operations agreement
  2. Announce your LLC (you can publish this announcement in a local newspaper)
  3. Apply for a bank account in your LLC’s name
  4. Acquire proper business licenses and permits in your LLC’s name
  5. Apply for a new Employer Identification Number (EIN)

 

Do You Need a New EIN if You Already Have One?

Because you are converting from a sole proprietorship to LLC, you may already have an EIN. Unfortunately, you will need to apply for a new one on behalf of the new LLC.

Your LLC is legally a new being and needs its own EIN different from one already in existence.

 

What To Do Next

You’re automatically considered to be a sole proprietorship if you do business activities but don’t register as any other kind of business.

The biggest disadvantage of a Sole Proprietorship and the reason why you should NOT start your business as a Sole Proprietorship is that you take personal liability for all business matters. What this means is that you will be held personally liable for the business’s debts and obligations as a Sole Proprietorship. So if your business gets sued or if something happens to your business as a sole proprietorship, then you will be personally responsible for your business (which you definitely don’t want to do).

There is nothing wrong with setting up your business as a sole proprietorship. In fact, it makes a solid foundation for building a business.

It, however, should only be a short-term plan for a growing business as sole proprietorship doesn’t offer you -as the business owner – any real personal protection.

By forming an LLC you create a “protective wall” between your business assets and your personal assets so if your business is sued then your personal assets (like your personal bank account, home, cars, properties, investments or anything that you personally own) will be safe and secure as they will not be considered a part of the business.

If you don’t form an LLC, your personal assets will be at MAJOR risk if your business get sued.

If you’re looking to protect your personal assets and looking to form an LLC, email me at sam@mollaeilaw.com to take the first step.

Sam Mollaei, Esq.

As a Business Lawyer for Entrepreneurs, I help entrepreneurs start their U.S. business without dealing with complicated government forms. I’ve assisted more than 2,246 entrepreneurs successfully start their business and I'm backed by more than 702 5-Star Google Reviews. If you're interested in starting your business, take the first step by requesting your Free Strategy Session on this page.

Start Your U.S. Business Confidently

Join 2,640+ Entrepreneurs Who Have Successfully Started Their U.S. Business Without Dealing With Complicated Legal Forms

YES! I Want to Start My Business

Step 1 of 2: Start Your Application

Privacy Policy: Your information is 100% safe and secure

"The way to get started is to quit talking and start doing." - Walt Disney

50% Complete

Start Your U.S. Business Confidently

Join 2,640+ Entrepreneurs Who Have Successfully Started Their U.S. Business Without Dealing With Complicated Legal Forms

Privacy Policy: Your information is 100% safe and secure.