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Sole Proprietorship to LLC (WHY Change to LLC?!)

Do you own a sole proprietorship?

The Small Business Administration (SBA) defines it as an unincorporated business often used as a testing ground before forming a formal company. But sooner or later you will want to form a formal business, such as an LLC.

There are 23 million sole proprietorships in the US, as of 2014, and many of these entrepreneurs should consider turning into an LLC.

So why changing a sole proprietorship to LLC a good idea?

  • Take advantage of limited liability
  • Less taxes because you’re no longer taxed as a self-employed contractor
  • More flexibility over how you’re taxed

The fact is that if you want to start a US business you need to seriously consider taking advantage of the LLC structure.

Send me a message at sam@mollaeilaw.com and tell me a little bit about your business. We will discuss whether the LLC structure is for you and how we can start to make that happen.

Sole Proprietorship to LLC

To convert a sole proprietorship to LLC you must go through a relatively simple process. The general path is the same, but different states will differ on incorporating an online business, but the only changes are in the specifics.

I can give you some extra help when it comes to the cost of incorporating an LLC and making sure that you don’t make any mistakes. All you must do is shoot me an email at sam@mollaeilaw.com.

Can I Turn My Sole Proprietorship to an LLC?

If you wish to change a sole proprietorship to LLC it is possible. No state prohibits you from making this change and you don’t need to start a new business to do it.

You will be happy to know that the process is almost the same as incorporating an LLC from the start. Remember that a sole proprietorship is not considered to be a type of formal business.

Think of the conversion process as a type of formalization of your business activities.

Can I Go from a DBA to LLC?

Yes, you can. A DBA can be transferred to an LLC.  It’s just a matter of transferring the registration from yourself to a new business.

But what is a DBA exactly?

Some states require you to have a ‘Doing Business As’ registration if your brand name is different from your official business name. Take note that not every state has this, so it may be irrelevant to you.

There is a process involved, but it is usually just a matter of filling in a form to transfer the registration. Your sole proprietorship may even have to write a letter of permission permitting the LLC to use that name.

In all cases you will have to form the LLC before you can move forward with transferring the DBA.

What is a Sole Proprietorship?

Before we can talk about switching from a sole proprietor to LLC we have to discuss what a sole proprietorship is, so you know what you are converting to. In short, it is not a business entity, but it defines a self-employed individual as doing business in that state.

Typically, a sole proprietorship will be used by an extremely small business in its early stages.

There are scenarios where people will do business for years without making a switch though. However, full-time entrepreneurs will rarely use the sole proprietorship business structure for long.

If you need help understanding why a sole proprietorship is a disadvantage, contact me at sam@mollaeilaw.com today and I will show you how your business can benefit by deciding to change a sole proprietorship to LLC.

What is an LLC?

An LLC is a type of formal business entity. It shields your personal assets from legal action and gives you far more options when it comes to tax and the way you structure your business.

Many people like to see the LLC as the halfway house between a fully incorporated corporation and a sole proprietorship. For many entrepreneurs, this is the perfect balance.

So, what can you expect an LLC to do for you?

  • Protect Your Assets – An LLC ensures that if someone sues you they can’t get at your personal assets. Only the assets of the business are at stake.
  • Less Paperwork than a Corporation – Many of the formalities of a fully-fledged corporation don’t exist with the LLC, which makes managing the business far easier.
  • Adopt the Tax Structure You Want – LLCs can opt to be taxed as a sole proprietorship, partnership, as well as both the C and S Corporations.
  • Pass-Through Taxation – Essentially you can get away with not having to pay corporation taxes as the LLC isn’t considered to be a separate taxable entity by the IRS.

There are a lot of advantages to deciding to convert a sole proprietorship to LLC. You can boil them down to advantages in tax and the ability to defend your personal assets from legal action.

What are the Responsibilities of Turning a Sole Proprietorship to LLC?

There are many filing responsibilities involved with deciding to change a sole proprietorship to LLC. You will also need to consider the running costs of an LLC, which are usually paid on an annual basis.

Therefore, a sole proprietorship is a good idea for brand new businesses that wants to test the waters. They don’t have any real responsibilities beyond filing taxes.

So, what are the main responsibilities you must consider?

You must register with the state you operate in. As well as these initial costs, you will usually need to file new paperwork and pay a recurring fee every year to maintain your registration.

There are also state laws you must adhere to. Depending on the state, these can be relatively lax or strict to comply with.

Again, depending on the state, there may be special business licenses and permits you need to operate. These typically must be renewed on an annual basis, which can be costly.

Finally, you must remember to keep records of your company’s activities. And these must be separate from any personal projects.

This is a common mistake entrepreneurs make. They believe that because the IRS doesn’t consider an LLC a separate taxable entity there is no need to keep records separate.

That couldn’t be further from the truth.

It is also important to remember that your regular filing responsibilities will depend on how you choose the LLC to be taxed.

You can only make this decision with the help of an expert. I’m a professional business lawyer based out of California and I can examine your business and make sure you are making the right decision regarding the different tax structures in your state.

How to Convert a Sole Proprietorship to an LLC?

How to change from a sole proprietorship to LLC? You first need to file the relevant documentation to bring the LLC into existence.

From there it is just a matter of dissolving your sole proprietorship and going through the rest of the process to officially form your LLC and to start doing business in your state of choice.

 

Step #1 – Check Your Business Name

To check your business’s name, you need to be able to make sure that it isn’t registered with another LLC in your state. And it doesn’t matter if you were using that same name as a sole proprietor.

You can check the name through the Secretary of State’s office for your state. Your state may even have an online database you can search to make this easier.

Once you have found a name that works you should use the United States Patent and Trademark Office database to ensure your name isn’t going to infringe on someone’s trademark.

Most states automatically register your name when you register, so there is no need to do this separately.

 

Step #2 – File Your Articles of Organization

The official form you need to send to form an LLC is known as the Articles of Organization. This is usually just a matter of laying out your business’s name and providing information about the owners.

State rules differ, but the three main pieces of information you will have to include are:

  • The name of the LLC.
  • The company’s address.
  • The names of any owners.

The average fee is around $100 to file, with some states charging more and some charging less.

 

Step #3 – Dissolution of Your Sole Proprietorship

With the groundwork lain for your new LLC, you need to dissolve your sole proprietorship by filing the necessary state form.

This is always going to differ by state, but it is essentially nothing more than an authorization to dissolve the sole proprietorship in question.

It is a relatively fast and simple process when switching from a sole proprietor to LLC.

 

Step #4 – Create an LLC Operating Agreement

Your LLC Operating Agreement will define how the LLC is run and the responsibilities/dividends of each member of the business.

Obviously, for an LLC with only one member this is unnecessary. But you can avoid legal disputes later by making sure you have one in place.

It is something I highly recommend to prevent problems later down the line.

You don’t need to file this with anyone and there is no legal requirement to even possess one. See it as an insurance policy for your business.

 

Step #5 – Get a New Bank Account

An LLC is a separate legal entity and thus you can no longer use your own personal bank account to do business. You must open a bank account under the name of your LLC.

Make sure you shop around for the best deal. Many banks have generous offers for new LLCs that are looking to incorporate.

 

Step #6 – Obtain Licenses/Permits/EINs

To do business you will need to obtain the necessary state business licenses and permits to operate. You will also need to get an Employer Identification Number (EIN) to file your taxes.

The cost of your business license and the permits you need will depend on the state and your business type. Take note that you will require separate business permits to operate in other states.

You will also need to file an application for a new EIN through the IRS online platform. This applies even if you had an EIN with your sole proprietorship.

 

Can You Transfer Ownership of a Sole Proprietorship?

Yes, you can do this. The original owner must sell their tangible and intangible assets to transfer responsibility for the business.

However, personal assets and business assets should be clearly defined within the purchasing agreement. Make sure you have a lawyer look over the purchasing agreement to make sure you are buying the entire sole proprietorship and its assets.

If you need assistance with this send me an email at sam@mollaeilaw.com.

 

How Long Does It Take to Convert a Sole Proprietorship to LLC?

The process can take just a few days, or it can take up to a month. It depends on factors like the state, the time of year, and whether you have appropriate representation.

I recommend making sure you have a business lawyer on your side, such as myself, to make sure there are no mistakes and that the process gets completed as soon as possible.

Dissolving your sole proprietorship and forming a new LLC can be done in as little as 3-5 business days with the right representation.

You need to decide whether it’s worth the stress and the hassle of trying to do it yourself to save a few dollars.

 

Conclusion

It may seem like a complex process to transfer from a sole proprietorship to LLC, but it doesn’t have to be. With my help, I will make sure that you make all the right decisions and get to the point where you can start operating as an LLC within just a few business days.

All I need is to understand your business.

That is why we should hold a consultation together today to make sure that this is the right decision and that you’re getting what you want out of it.

Just get in touch with me today at sam@mollaeilaw.com and we’ll get started with converting your sole proprietorship to a brand-new LLC!

Are you ready to make the switch?

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.

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