Change From Sole Proprietorship to LLC: Everything You Need to Know
To change from a sole proprietorship to an LLC, also known as a limited liability company, is almost like starting an entirely new business. 3 min read
To change from a sole proprietorship to an LLC, also known as a limited liability company, is almost like starting an entirely new business. You might have to change your business name, and you'll be required to file documents and pay fees that you probably didn't have to worry about before. It can be beneficial to make the change, especially in terms of legally protecting your personal assets.
Sole Proprietorship Versus LLC
When you operate as a sole proprietorship, you're personally liable for any business debts and lawsuits, which could have devastating consequences. An LLC, however, is a separate entity from you, so in case your business is sued or has other penalties and legal obligations against it, it will be subject to legal actions, not you.
An LLC has some tax advantages compared to a sole proprietorship, and you have different ways to structure your business taxes.
Your LLC can have more than one owner, or member. A sole proprietorship has only one owner. However, your LLC can also be a single-member LLC if you're the sole owner. All other rules for LLCs apply to single-owner companies.
While it's affordable and easy to form a sole proprietorship, it's treated as the same legal entity as its owner. LLCs are also affordable and easy to form but enjoy the distinction of being separate legal entities from their owners.
Changing From a Sole Proprietorship to an LLC
As a sole proprietorship, your business and you are considered one entity. This changes when you convert to an LLC.
Once you change to an LLC, you must have a unique name for your business. If the business name you wish to use is registered in your state already, you won't be able to start your LLC with that same name — even if you used it for your sole proprietorship. You can visit your Secretary of State website to check the availability of your desired business name. If you like, you can get help from a legal professional to propose a suitable name.
When you find an available business name, you should also check to make sure you don't infringe on someone else's trademark for the name by visiting the U.S. Patent and Trademark Office site.
Your LLC name must end in one of the following:
- Limited Liability Company
- Liability Co.
Typically, you don't have to register your business name because it should automatically register when you file paperwork to form the business.
To start an LLC, you'll complete and submit a formation certificate — sometimes called the Articles of Organization — to your state filing office. Check the specific requirements for your state as they can vary from one state to another. The Articles of Organization simply details some specifics about your business, such as the following:
- Business name and address
- Owner name(s)
- Registered agent
Your registered agent is an individual or company that agrees to receive legal papers on your company's behalf.
You'll have to dissolve your sole proprietorship or DBA with the agency where you initially registered it, whether it's on the city, county, or state level.
Draft an operating agreement for your LLC. This establishes rules for ownership and operations. The operating agreement details how your business will be managed as well as the rights and responsibilities of its members. It also details each member's voting power and everyone's portion of profits and losses.
You don't have to file your operating agreement with any government or legal agency. However, if your LLC has more than one owner, it's a smart move to create this agreement in order to cut down on any business conflicts that may arise in the future.
Your state may require you to publish a public notice about your intention to start an LLC. Usually, you can do this in your local newspaper. You should open a new bank account under your LLC's name to ensure separation of personal and business funds.
LLCs enjoy certain benefits that sole proprietorships don't, but the legal separation of you and your business is one of the biggest. Because it's inexpensive and simple to form an LLC, you might consider changing to this business structure for your own protection.
If you need help changing from a sole proprietorship to an LLC, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.