Can I Change My Sole Proprietorship To An LLC?Everything You Need to Know
When a business owner feels like they have outgrown the sole proprietorship status and they want to explore the benefits of an LLC, they’ll wonder if it’s possible to switch from one to another.
Let’s go over some of the benefits of an LLC compared to a sole proprietorship, and more important whether or not you can change a sole proprietorship into an LLC after the sole prop has already been established.
Can I Change My Sole Proprietorship To an LLC in 2022?
Yes, you can change your sole proprietorship to an LLC.
It’s not very complicated to change a sole proprietorship to an LLC.
Let’s go over why someone might want to do this, if there’s an ideal time to switch from a sole prop to an LLC, and some of the benefits of doing this.
How To Change Your Sole Proprietorship to an LLC
It’s not very difficult to make the switch from a sole proprietorship to a limited liability company.
Here’s a quick overview of each of the necessary steps so that you have a rough idea what needs to be done.
Some of the steps can be a bit more involved than you’ll see in the overviews below, but don’t let that discourage you.
You’re essentially ceasing to do business as a sole proprietorship (which is not a distinct legal entity from yourself as an individual) and starting to do business under the structure of an LLC (which is a distinct legal entity from yourself).
Step 1: Check The Business Name
Before you can proceed with turning your sole proprietorship to an LLC, you need to make sure that the name of the business is available to be registered in the place you’re planning to register it, and that there isn’t another company in the same industry using the same name.
You can do a name search to find out if another business is registered with that name.
You may have been using it, but that doesn’t mean you can register it as an LLC name if someone already has it.
Each state has their own entity that is responsible for registering business names and handling various forms of business filing, so check with them and then you’re ready to proceed with the process.
Step 2: File The Necessary Organization Documents
The articles of organization need to be filed at the aforementioned agency in your state that handles business documents, registration, and bureaucracy.
The exact name of this branch may vary from state to state, but they typically operate under the secretary of state.
The articles of organization will require some basic information about your plans for the LLC, how you do business, and so on.
You’ll need to include an address, you’ll need to identify the registered agent, and more.
Since the LLC is a separate legal entity from the person who creates the LLC, the LLC will also need to create an operating agreement.
The operating agreement covers the various members of the LLC (the owners) and will discuss how the LLC will handle things like profits, non-compete agreements, and what happens when a member wants to take a step back from owning the business.
Step 3: Get an EIN
An employer identification number is a unique nine-digit number that helps identify the business to the IRS, to lenders, to the business credit bureaus, and more.
With a sole proprietorship, you can obtain an EIN but it isn’t necessary because you can just use your social security number, instead.
Even still, it’s a good idea for sole proprietors to get an EIN for the business to keep it separate from their SSN for the sake of privacy.
If you have an EIN for the sole proprietorship and you’re switching over to an LLC, you’ll want to get a new EIN from the IRS in most cases.
This is very easy to do, simply full out the SS-4 form and submit it to the IRS and they will give you an EIN (employer identification number).
Step 4: Setup Business Banking for the LLC
When you have a name for the LLC and the necessary business documents have been filed in the state you’re going to operate in, then it’s finally time to set up a bank account for the LLC.
You may also want to open up a business credit card for an LLC.
If you used a different bank account for your sole proprietorship, then you already know the drill.
If you used your personal bank account for the sole prop, then you need to stop using your personal bank account for business moving forward and use a new bank account for the LLC, instead.
Step 5: Consult With a Professional
It’s advisable to consult with an attorney if your business structure is at all complex or complicated, since there are some mistakes that can be quite costly, and it doesn’t cost much to have a professional handle the finer details of this.
An LLC service is a company that helps businesses form into an LLC, or entrepreneurs to start an LLC from scratch.
It’s worth a relatively small fee if your business is anything other than small and super straightforward.
It’s easy to overlook things that can end up coming back to haunt you and your business down the road, but you don’t need a professional if you’re comfortable following all of these steps yourself, making some phone calls to your local business agency within your state government when you need help, and spending some time reading and researching online.
Benefits of Switching to an LLC From a Sole Proprietorship
The benefits of a sole proprietorship are the ease of forming it and running it.
That’s about it, really. Beyond that, the benefits of going with an LLC instead really start to stack up quickly.
An LLC offers protection for the owner’s personal assets.
The business is a separate entity, so if the business is sued or faces financial hardships, it won’t affect the owner the same way as it would if they had a sole proprietorship that was, for example, sued by a competitor or an unhappy customer.
There are tax implications for running an LLC as well, and it can leave the business and owner in a beneficial situation in terms of having more control over their taxes.
LLC’s are easier to set up than a corporation, while offering some of the same benefits.
Why do People Start With a Sole Proprietorship?
People often start with a sole proprietorship simply because it’s a very simple business structure and it’s the easiest way to start a business.
If somebody is an owner/operator, or even if they’re hiring contractors, then a sole proprietorship is usually a great fit.
A sole proprietorship also works great for independent contractors, freelancers, and other businesses with one owner but it also has its limitations which is why sole proprietor entrepreneurs are often looking to switch to an LLC.
Final Thoughts on Changing A Sole Proprietorship to an LLC
There are numerous reasons that a business owner may decide that it’s time to switch to an LLC.
Whatever your reason is, make sure you take the time to plan and get all of your ducks in a row before making the switch.
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