How to Change from a Sole Proprietorship to an LLC: Everything to Know
How to change from a sole proprietorship to an LLC is the process to convert your single-owner business to a limited liability company.3 min read
How to change from a sole proprietorship to an LLC is the process to convert your single-owner business to a limited liability company. If you have a business but have never officially registered with the state, you are treated as a sole proprietorship by default. Forming an LLC protects your personal assets in the event your business is sued or incurs debt. This is an affordable, relatively simple process for most small business owners.
In addition to liability protection, the LLC structure provides flexible tax treatment and management. Your tax attorney or CPA can advise you as to the best taxation strategy for your LLC. You'll need to follow state guidelines for LLC maintenance, such as annual reporting and fees, to maintain your personal liability protection. This also requires keeping separate bank accounts, loans, and credit cards for the business. Follow these steps to establish your LLC.
Make Sure the Business Name Is Available in Your State
You need to find a name for your LLC that is not already used by another business in your state. You can do a search on the website of most Secretary of State offices. A legal filing service can also conduct a business name search on your behalf. You should also check the U.S. Patent and Trademark Office to make sure the name you want doesn't infringe on a federally registered trademark.
Your business name must include the words limited liability company or an abbreviation, such as Ltd. or LLC. The LLC name is automatically registered when your LLC paperwork is submitted and approved by the Secretary of State.
File Articles of Incorporation
This basic document provides the state with information such as:
- The name and address of the LLC.
- The purpose of your business.
- The name and address of your registered agent (a person designated to receive legal paperwork on behalf of your LLC).
- An indication of whether the company is member- or manager-managed.
In most states, the filing fee is around $100, but some states charge more or less. The registered agent can be a member of the LLC or a professional such as your attorney.
Create an LLC Operating Agreement
Although a single-member LLC doesn't necessarily need an Operating Agreement, it is an essential step for LLCs that have more than one member. This document establishes management and ownership procedures for the business. Items that must be covered in the operating agreement include but are not limited to:
- The ownership percentage of each member.
- The voting rights of each member.
- Procedures for distributing profits and losses among the members.
- Steps to take if a member wants to leave the business.
When the operating agreement is signed by all members, it is a legally binding document that can prevent future disputes and misunderstandings.
Publicize Your LLC
In some states, you will need to run an announcement about the formation of your LLC in the local paper. The local clerk determines the specific publication and the length of time. Your state can provide the exact requirements. In most cases, you have to provide written proof of publication with your LLC application.
Register for an EIN
- Pay your employees.
- Apply for business credit and loans.
- Open bank accounts for your LLC.
- File taxes.
Apply for a New Bank Account
You'll need to close any existing business bank accounts for your sole proprietorship and open a new one under the name and the EIN of your LLC. Having an LLC requires distinct separation between your personal and business finances. This helps streamline tax reporting and protect your limited liability.
Apply for Business Permits and Licenses
The business licenses and permits you need depend on your industry and location. You may need to reapply for business permits and licenses when you switch to an LLC from a sole proprietorship. Check with your local business office to find out about the LLC permits you need for your business.
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