How to Change a Sole Proprietorship to an LLC
Learn the ins and outs of switching from a sole proprietorship to LLC, step by step.
If you’re an independent contractor or freelancer, chances are that your business is structured as a sole proprietorship. It’s the simplest, easiest-to-understand business structure — not to mention the least expensive. And when you’re embarking on your small business journey, why not make it easy on yourself?
Even though setting up a sole proprietorship is straightforward (just about anyone can do it) and cheaper than other business structures, it might not be the best choice for the growth of your company. There is a time and place for everything, and your business classification is no different. Read on to learn the why’s and how’s involved in making the sole proprietorship switch to an LLC.
Why Should I Change a Sole Proprietorship to an LLC?
As with most things in life, there are LLC and sole proprietorship pros and cons to consider before making the switch. So, how do you know if you should change from a sole proprietorship to an LLC?
First, familiarize yourself with the difference between a sole proprietorship vs an LLC. Then, consider this rundown of situations in which changing to an LLC could benefit your business:
- You want to bring on another owner
- It’s time to hire an employee or two
- You’re worried about protecting your personal assets
While you like being the boss of your own domain, sometimes it’s beneficial to bring on another business owner to help scale the company, provide specialized industry expertise, or help with financing. In a sole proprietorship, you and only you make all the decisions. With a multi-member LLC, you can include an operating agreement that allows more than one person to be at the helm.
Perhaps you started a small accounting business a few years ago, and you just landed a large client that requires more work than you can handle on your own. It’s time to hire another employee — but you can only do that if you switch business structures. An LLC can hire any number of hourly or salaried employees and even independent contractors.
Protecting your personal assets is one of the biggest reasons to transfer a sole proprietorship to an LLC. What does that mean exactly? In the unlikely event that someone sues your business or you can’t pay certain debts, the suing parties or creditor can legally come after your personal assets (think house, car, or savings) to fulfill outstanding payments. With an LLC, it’s all in the name: A Limited Liability Company limits the personal liability for these types of scenarios, keeping you and your business separate.
Now that we’ve covered the “why,” let’s review the steps for how to change a sole proprietorship to an LLC.
Choose a Business Name
While your personal name is often used as the business name in a sole proprietorship, a business name is typically chosen when creating an LLC. Create a name that aligns with your business’s products or services, reflects your personal values, and is easy to remember. But most importantly, make sure your business name isn’t already being used. You can learn if a name is available through your state’s business filing agency. It’s also a good idea to check federally trademarked names through the U.S. Patent and Trademark Office’s website.
If the personal name associated with your sole proprietorship already has a large following or presence in your local community, you may not want to change it. Depending on your state, you might be able to register the LLC with your own name. You can also consider adding the type of products or services you provide to your name. For example, Martha Textings Cleaning Solutions, if your state restricts using a personal name alone.
Find a Registered Agent
When filing as an LLC, most states require you to list a registered agent on your Articles of Organization (more on that next). The registered agent essentially serves as the person who receives all business-related legal and government documents.
While you can list just about anyone — including yourself — as a registered agent, a best practice is to hire a professional who is separate from your company. With remote work here to stay, you’ll want to protect your personal address, so hiring an individual or service to receive important mail will be your best bet when you change your sole proprietorship to an LLC.
File Articles of Organization
LLC filing forms, aka Articles of Organization, are documents that you fill out when registering your business as an LLC. All 50 states require some version of Articles of Organization, but the information required varies by state. Here’s what you may be expected to provide:
- Your business name and address (sorry, no P.O. boxes allowed)
- A company purpose statement
- Proof of a registered agent
- Names of the owners of the LLC
- Duration of formation (perpetual or indefinite)
- Application or start date
Check your Secretary of State’s office for information pertaining to your state.
Write an Operating Agreement
An operating agreement is a key document differentiating an LLC from a sole proprietorship. In this agreement, you (and the other business owners, if any) will lay out the rules and general operations of the business as well as the ownership details of each LLC member (think: who runs what). While most states don’t require you to formally file this document, it’s a good practice to keep this with your business records.
Apply for an EIN
If you didn’t have an EIN for your sole proprietorship, now is the time to get one. If you already have an EIN, you may need to apply for a new one depending on your LLC’s tax filing status and the number of owners/members. Get more info about which types of business structures need an EIN and how to apply for one at IRS.gov.
Open a New Bank Account
To stay true to keeping your business and personal assets separate, open a bank account that is only for your LLC. Remember to update all payment information with your clients so that they submit payments to the correct account.
An accountant for a small business may be able to help you with this step and ensure that you’re dotting your i’s and crossing your t’s.
Update Business Permits & Licenses
You should already have secured a business license when you started your business as a sole proprietorship, so you’ll need to update it and any local permits with your new LLC information. The permits or licenses you’ll need for your new business structure vary by state.
Bonus Step: Hire an Expert
If all these steps seem like too much to keep track of, an optional step in the process of transferring a sole proprietorship to an LLC is hiring a lawyer. Navigating the documentation and knowing what exactly you need to do based on various factors — where your company operates, the type of business you have, and so on — can be challenging. Many successful small business owners rely on experts to help make their daily operations run smoothly. You already have enough on your plate, right? Consider hiring an attorney and even a financial planner for small business.
How EZ Texting Can Grow Your Business
Now that you understand the ins and outs of making the sole proprietorship switch to an LLC, it’s time to take the next step in setting up your small business goals. Defining your optimal business structure is just one of them.
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