Convert Sole Proprietorship to LLC: Everything You Need to Know
Are you looking to convert a sole proprietorship to an LLC? With sole proprietorships, business owners and their business constitute a single entity. 3 min read
What Is a Sole Proprietorship?
Are you looking to convert a sole proprietorship to an LLC? With sole proprietorships, business owners and their business constitute a single entity. There is a single owner who pays taxes through their personal tax return rather than a corporate tax return.
What Is a Corporation?
Corporations create a separate entity for a business. There is a clear separation between the owner's assets and the business' assets. Multiple owners are possible with a corporation. Small businesses tend to choose the S corporation designation. S corporations pay their taxes only on dividends rather than paying full corporate taxes.
What Is an LLC?
LLCs protect the members' personal assets from harm from lawsuits and creditors. In most states, owners do not need to pay corporate taxes in order to have the business' revenue pass through to their personal accounts. LLCs offer a greater amount of flexibility in profit distribution between owners.
Advantages of Incorporating
When you incorporate your business, personal assets get separated from the business' assets, and they are protected from bankruptcies and lawsuits. Businesses that have shaky funding or are in an industry where lawsuits are common are wise to incorporate. You might also incorporate if you have significant personal assets to protect. There are also significant tax savings with corporations, so highly profitable companies tend to incorporate.
Benefits of an LLC
An LLC filing creates a new legal entity or "person" that has separate legal properties from the member. Some of the rights of an LLC include owning property, opening bank accounts, owning a business, and selling property.
The Difference Between a Sole Proprietorship and an LLC
As a sole proprietorship, you leave yourself vulnerable to a lawsuit as the filing party can sue you personally. Since an LLC is separate from yourself, prosecution can only target the LLC, not the members personally. Furthermore, there are several tax advantages to filing as an LLC compared to sole proprietorships, and they allow you to make more choices about how you pay taxes.
Multiple people can be the owners (or "members") of an LLC. Sole proprietorships are, by definition, limited to a single owner. However, if you are the only owner of your business but still want the protections offered by a corporation, you can file as a single-member LLC. Sole proprietorships are very easy to create, since they are simply the same legal entity as their owner. Forming LLCs are moderately more involved but are affordable in most states.
How to Change from Sole Proprietorship to an LLC?
Don't forget that when you are a sole proprietorship rather than an LLC, you are the same entity as your business. If you choose to convert to an LLC, the first thing you may need is a name that meets the following criteria:
- Your business name must be different than your own name.
- Your business name must be unique and not registered to another business in the state. Even if you were already using the name for your sole proprietorship, you might need to change it in order to register as an LLC.
- You can check your business name's availability with your state's office of the Secretary of State. Check to see if your state hosts an online database that you can search for information about existing LLC names.
If you're having trouble creating a name that meets this criteria, you can consult with an attorney. Make sure to check for trademarks as well. The United States Patent and Trademark Office keeps a database of trademarked names. Make sure the phrase "LLC" or "limited liability company" is included in your company name. Generally, registration of your LLC name is taken care of for you when you form the LLC.
When you fill out the official paperwork of your state, check the local requirements for your articles of organization, since every state is slightly different. Articles of organization tell the state important details about your company, such as your name, contact details, and the owner structure.
Your LLC will need to have a registered agent who can receive legal papers. As a sole owner, you automatically become the registered agent. Your next step will be to cancel the DBA, or "doing business as," you filed as a sole proprietor. Multi-member LLCs get to decide who becomes the business's registered agent.
If you need help with converting 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.