Going From Sole Proprietorship to LLC: Everything You Need to Know
Change your business type from a sole proprietorship to an LLC in order to have personal liability protection,expand your business by operating as an LLC.3 min read
2. Formation Paperwork
3. Final Steps
If you're going from sole proprietorship to LLC, you'll have to do the following:
- Choose an appropriate business name.
- Designate a registered agent.
- File an Articles of Organization.
- Create an operating agreement.
- Publish a notice of intent (not required in all states).
- Talk to your insurance company.
- Obtain a new EIN.
- Open a business bank account.
- 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.
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:
- Your LLC name
- Your LLC address
- LLC owner names
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.
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.
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