Key Takeaways

  • Changing from a sole proprietorship to an LLC in Illinois offers liability protection, potential tax advantages, and increased business credibility.
  • Before filing, ensure your LLC name is unique and compliant with Illinois naming rules, and appoint a registered agent.
  • Illinois requires filing Articles of Organization with the Secretary of State and paying a state filing fee (currently $150).
  • You must draft an operating agreement, obtain a new EIN, transfer business assets, and update contracts and bank accounts.
  • Converting your business structure can help separate personal and business finances, limit liability, and position your company for future growth.

If you're going from sole proprietorship to LLC, you'll have to do the following:

  1. Choose an appropriate business name.
  2. Designate a registered agent.
  3. File an Articles of Organization.
  4. Create an operating agreement.
  5. Publish a notice of intent (not required in all states).
  6. Talk to your insurance company.
  7. Obtain a new EIN.
  8. Open a business bank account.
  9. Obtain the necessary licenses and permits.

You might want to change your business type from a sole proprietorship to an LLC in order to have personal liability protection. You can also expand your business by operating as an LLC.

How to Change from a Sole Proprietor to an LLC: First Steps

To form an LLC, you'll need a business name that's unique and distinguishable. An existing LLC in your state may be using the same business name as you. Even if you've used that name for your sole proprietorship, you'll have to choose another name for your LLC.

You can usually check the availability of a business name at the Secretary of State website. Once you confirm your desired business name is available to use in your state, you must also ensure that it doesn't infringe on a trademark. You can check the database at theU.S. Patent and Trademark Office website for this information.

Your business name must have an appropriate designator on the end, such as “Limited Liability Company,” “Ltd.,” or “LLC.”

You'll have to designate a registered agent — also known as an agent for service of process or a statutory agent — for your LLC. This is a person or company that acts as your business's main point of contact for communicating with legal authorities. A registered agent agrees to accept legal paperwork and service of process on behalf of your company.

Illinois-Specific Considerations Before Forming Your LLC

If you’re changing from a sole proprietorship to an LLC in Illinois, it’s important to understand a few state-specific requirements before filing. These considerations will ensure a smooth transition and help you avoid costly delays.

  1. Business Name Availability: Illinois requires your LLC name to be distinguishable from other registered entities. Use the Illinois Secretary of State’s online database to confirm availability. The name must include “Limited Liability Company,” “LLC,” or “L.L.C.” and avoid restricted terms like “bank” or “insurance” unless specifically authorized.
  2. Registered Agent Requirements: Your registered agent must be a resident of Illinois or a business authorized to operate in the state. They must maintain a physical address (P.O. boxes are not accepted) and be available during business hours to receive legal documents.
  3. Business Licenses and Local Permits: Even if you already have permits under your sole proprietorship, converting to an LLC might require you to reapply under the new entity name. Cities like Chicago and Aurora often require updated business licenses once the structure changes.
  4. Tax and Compliance Obligations: Illinois imposes an annual report fee of $75 for LLCs. Additionally, if your business is subject to state sales tax, ensure your new LLC registers for an Illinois Business Tax (IBT) number with the Department of Revenue.

Formation Paperwork

To formally create an LLC, you'll file a form with the state. In most states, formation documents are called the Articles of Organization. It's a brief document that provides details about your company. Basic information listed in your Articles includes the following:

The average filing fee for submitting your Articles is around $100, but the cost is higher in some states. You designate a registered agent in your Articles. If you're the only owner of your business, you can act as the registered agent. For multi-member LLCs, one of the members may fill this role.

You should also create an operating agreement. This document lays out the rules for how your business is owned and operated. It also outlines how you'll manage your business. Other items covered in an operating agreement include the following:

  • The rights and responsibilities of the LLC's members
  • Members' voting power
  • Allocation of profits and losses

In most cases, you don't have to file an operating agreement with the state. However, it's still recommended to have one if your LLC has more than one owner. Since it clearly defines roles and responsibilities, it can cut down on conflict between owners if a disagreement arises.

Transferring Assets, Contracts, and Business Relationships

After filing your Articles of Organization, you’ll need to formally transition your existing business assets and relationships to the new LLC. This step is often overlooked but essential to ensuring legal and financial continuity.

  • Re-title Assets: Move ownership of vehicles, real estate, and equipment from your personal name to the LLC. This ensures that liability protection applies to these assets.
  • Assign Existing Contracts: If you have ongoing contracts with vendors or clients, update them to reflect the new LLC as the contracting party.
  • Transfer Intellectual Property: Any trademarks, copyrights, or proprietary materials should be reassigned to the LLC.
  • Notify Financial Institutions: Update your business bank accounts and credit cards under the LLC’s EIN and legal name.
  • Communicate With Stakeholders: Inform clients, suppliers, and partners about the new business structure to prevent confusion and reinforce your company’s credibility.

Final Steps

Depending on your state, you may have to publish a notice of intent in a local publication or newspaper, announcing your intention of starting an LLC. You may be required to publish it more than once and provide proof to the state that you met this requirement.

You should contact your insurance provider to let them know you're changing your business structure. Your insurance company can tell you if you need to purchase a different policy.

Opening a business bank account helps you create more of a legal separation between you and your business. Having this separate account adds protection to your personal assets.

Obtain any licenses and permits that your LLC needs, such as a zoning permit, seller's permit, and business license. You'll also need a new Federal Tax ID or Employer Identification Number (EIN) from the IRS, even if you already had one as a sole proprietor.

Changing from one business type to another will involve some time and effort, but it's often worth it if you gain certain advantages, such as tax benefits or liability protection. Make sure you choose the business structure that's best for your company, so consider short- and long-term goals when making the decision.

Tax and Liability Advantages of Converting in Illinois

One of the biggest reasons business owners consider changing from sole proprietorship to LLC in Illinois is the legal and tax advantages that come with the new structure.

  • Limited Liability Protection: Unlike a sole proprietorship, an LLC shields your personal assets — such as your home, car, and savings — from business debts and lawsuits.
  • Tax Flexibility: By default, single-member LLCs are taxed as disregarded entities, and multi-member LLCs as partnerships. However, you can elect to be taxed as an S corporation or C corporation, potentially reducing self-employment taxes and optimizing your overall tax burden.
  • Professional Credibility: Adding “LLC” to your business name signals professionalism and stability, which can make it easier to secure contracts, attract clients, and qualify for financing.
  • Succession and Growth Opportunities: An LLC makes it easier to bring in new members, transfer ownership interests, or sell the business in the future.

Frequently Asked Questions

  1. How much does it cost to change from a sole proprietorship to an LLC in Illinois?
    The filing fee for Articles of Organization is currently $150. Additionally, you’ll pay a $75 annual report fee each year to maintain your LLC.
  2. Do I need a new EIN when forming an LLC?
    Yes. The IRS considers an LLC a new legal entity, so you’ll need to apply for a new Employer Identification Number, even if you already had one as a sole proprietor.
  3. Can I keep my existing business name?
    Possibly. As long as the name is available and complies with Illinois naming rules (including “LLC” or “L.L.C.”), you can often retain it.
  4. Will I need to change my business licenses?
    Most likely. Many Illinois municipalities require you to reapply for local business licenses and permits under the LLC name.
  5. Can I convert to an LLC without closing my sole proprietorship?
    No. Converting typically involves forming the LLC as a new legal entity and then transferring your business operations, assets, and accounts into it.

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