When a business owner is starting out, operating as a sole proprietor often makes sense. As the business grows, switching from sole proprietorship to LLC could be a wise choice. Learn how to convert from sole proprietorship to LLC.
Sole proprietorship vs. LLC: What’s the difference?
It can be hard to know if changing from a sole proprietorship to an LLC is right. Take a look at these key points on each business structure to help you decide.
Sole proprietorships are…
- Owned by one person
- Easy and affordable to form
- Considered the same legal entity as the owner
With a sole proprietorship, you are personally responsible for all business losses, debts, and liabilities.
Limited liability companies (LLCs) are…
- Owned by one person or more (called members)
- Moderately easy and affordable to form (in most states)
- Considered different legal entities than the owners
LLCs combine aspects of corporations and partnerships. An LLC separates business and personal liabilities, so your assets are protected and owners not liable for business debts. There is also a shared tax responsibility between members, like a partnership.
How to change from sole proprietor to LLC
Converting a sole proprietorship into an LLC can help you grow your business and protect your personal property. Follow these steps to make the transition.
1. Check your business name
When you are converting a sole proprietorship to an LLC, you need a unique business name. Your current business name might already be registered to another LLC in your state. If that’s the case, you cannot operate as an LLC under that name, even if you’ve been using it as a sole proprietorship.
Check if the name is available by contacting your state’s secretary of state office. Many states have an online database for registered business names. You can also have a legal professional help you propose a name for your LLC.
Once you’re sure no one in your state uses your business name, make sure it doesn’t infringe on anyone’s trademark. Use the United States Patent and Trademark Office’s database to search trademarks.
You must include “Limited Liability Company” in your business name. Or, you can use an abbreviation like “LLC,” “Ltd.,” or “Liability Co.”
Usually, you don’t need to register your LLC name. The name is automatically registered when you file paperwork to form the LLC. State rules differ, so double check with your state.
2. File articles of organization
To form an LLC, you must fill out an official form and send it to your state’s filing office. Each state has different requirements for the articles of organization.
It is a short, simple document that outlines details about your business. Information on the articles of organization include:
- LLC’s name
- Names of owners
You need to pay a fee to submit your articles of organization. Most submission fees are about $100, but some states charge more.
The articles of organization usually require a registered agent to receive legal papers. If you are the sole owner of the LLC, you are the registered agent. If you have a multi-member LLC, you will need to appoint one member as the registered agent.
3. Write an LLC operating agreement
An LLC operating agreement sets the rules for ownership and operations. This document maps out how the business will be managed. The operating agreement includes details about the LLC members’ rights and responsibilities, voting power, and portions of profits and losses.
You don’t have to submit an operating agreement to any government or legal organization. But if you have more than one member, it’s a good idea to create one. An LLC operating agreement reduces conflict between members.
4. Announce your LLC
Some states require you to publish a public notice stating that you intend to form an LLC. You can publish the announcement in a local newspaper.
You might need to publish the notice several times and submit written proof to the LLC filing office. Check with your state to see the exact requirements for publishing a notice.
5. Apply for a new bank account
When you form an LLC, you create a new legal entity. The business has many of the same rights as a person, including being able to own property and open a bank account.
Opening a bank account under the name of the LLC helps you separate business and personal funds. A separate business bank account helps you protect personal assets, keep records, and report taxes.
6. Get business licenses and permits
You need to register new business licenses and permits for your LLC. Check with your state to find out which licenses and permits apply to your business. Licenses you might need include a business license, seller’s permit, and zoning permit.
You must apply for a new Employer Identification Number (EIN) with the IRS. This is true even if you already have an EIN for your sole proprietorship.
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