Updated August 3, 2020:

How to Change From Sole Proprietorship to LLC

To change from a sole proprietorship to LLC, you must first understand each business type. Sole proprietorship business structure means the business owner and the business are considered to be a single entity. One individual owns the business, and this person pays personal income tax on profits generated by the business. The owner doesn't pay corporate taxes.

Advantages of running a sole proprietorship include:

  • Less paperwork, including simpler tax returns

  • Fewer regulations

  • Few ongoing requirements, if any

  • No requirements on paying unemployment tax on your income

You also aren't legally required to separate your business assets from your personal assets. However, it's still a good idea to avoid mixing business finances with your personal finances. While you don't have to pay unemployment tax on your income, you will be subject to this tax in the event you hire an employee.

One of the disadvantages of sole proprietors is that in the event a lawsuit or other legal action is filed against you, you're open to losing personal assets if you lose the case.

What Is an LLC?

An LLC forms a brand-new, legal "person." This legally recognized entity holds many rights that a person does, including the ability to:

  • Own property

  • Own bank accounts

  • Buy and sell property

  • Operate a business

LLCs provide protection for personal assets of the business owner in the event of a debt or lawsuit. In many states, owners — also known as members — are able to collect profits through the business without being subject to corporate taxes. Members in an LLC enjoy a great amount of flexibility in how profits are distributed.

LLCs are separate from the owners, so the business would be subject to legal obligations and most lawsuits, not you personally. LLCs also have some tax advantages over sole proprietorships, as these companies can structure their business taxes in various ways. If there's only one member, or owner, in an LLC, the rules governing LLCs still apply.

Should You Convert From a Sole Proprietorship to an LLC?

If you convert from a sole proprietorship to an LLC, you won't be able to:

  • Avoid paying loans you've put a personal guarantee on

  • Dodge the company's tax burdens

  • Avoid penalties if you've committed a crime

In addition, time limits exist for:

  • Specific filing requirements

  • Proper transfer

  • LLC taxes

  • Meeting state regulations

These limits are in place to ensure that your LLC complies fully with the requirements and regulations in your state.

On Moving From a Sole Proprietorship to an LLC

When you decide to establish an LLC, it's worth getting professional assistance if you can. The steps on making this move include:

  • Checking the availability of the business name you want

  • Filing specific paperwork, or the Articles of Organization

  • Dissolving your sole proprietorship

  • Applying for a new EIN with the IRS

  • Opening new bank accounts in the LLC's name

  • Applying for necessary licenses and permits

  • Notifying insurance providers of changes

  • Changing business contact information and other incidentals

The Secretary of State office in your state will let you know if your desired business name is available. You'll also file your Articles of Organization with your state office. You must dissolve your sole proprietorship or DBA with whatever city, county, or state where it was originally registered.

Your new EIN will be used for:

  • Filing business taxes

  • Opening bank accounts for your business

  • Handling payroll

  • Obtaining credit for your company

Any bank accounts associated with a sole proprietorship will have to be closed. You'll open new bank accounts in your LLC's name and with the new EIN. You'll have to apply for all licenses and permits legally required for you to run your business. These may include:

  • A professional license

  • A health department permit

  • A reseller's permit

You'll also have to contact your insurance provider to let them know you're changing your business structure. Your provider will then be able to tell you if you have to purchase a new insurance policy for your business.

Finally, you'll have to change your:

  • Business letterheads

  • Website(s)

  • Business cards

  • Telephone listings

  • Other pertinent contact information

It's a lot of work, but these steps are necessary to avoid liability in case someone claims you're still running a sole proprietorship. Once you make this change, you'll be personally protected under the laws governing LLCs.

If you need help with 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.