How to Convert a Sole Proprietorship to an LLC

November 19, 2021

Are you a new entrepreneur asking, “Can I change my sole proprietorship to an LLC?” Well then, you have nothing to worry about, because you certainly can!

A sole proprietorship may indeed be simpler to run and manage, but a Limited Liability Company, or LLC for short, can give you an upper hand in business that the former can’t.

Wondering what those benefits are? Then, continue reading to discover these advantages and the method to convert a sole proprietorship to an LLC.

Difference Between Sole Proprietorship and LLC

The most significant difference between a sole proprietorship and LLC is that a Limited Liability Company is a separate legal entity from the business owner. On the other hand, there is no legal distinction between a sole proprietorship and its owner.

However, you need to remember that a single-member LLC is essentially a sole proprietorship for tax purposes, so there isn’t much distinction between the two in that respect.

Another major difference is that you have to formally register an LLC with a state; there’s no need for registering a sole proprietorship because a sole proprietorship is basically the default business structure. Think cutting hair on the side or selling jewelry on Etsy. Both types of businesses are classified as sole proprietorships by default.

Benefits of LLC vs. Sole Proprietorship

Legally speaking, you are open to liability the minute you begin to operate your business. Forming an LLC can better protect you from being personally liable for business debts or lawsuits. A sole proprietorship provides no such protection. This means that as  a sole proprietor, your personal assets are at risk of debt-creditors trying to seize them.

Another advantage of an LLC vs. sole proprietorship is that an LLC can choose to be taxed as an S-corp

Sole Proprietorship vs LLC: What's the Difference? [Infographic]

Switching from Sole Proprietorship to LLC: A Step-by-Step Guide

As you begin to expand your business operations, you may want to convert your sole proprietorship to an LLC sooner than later. Here’s an overview of the process:

  • Choose a name for your business. If you’ve already picked out a name, make sure to peruse the Federal Trademark Records and your state’s registry to confirm the name isn’t already taken within your state. There’s a risk in choosing the same name as another business entity in your state: The state may simply refuse to accept your filed documents
  • File the specialized LLC document, typically referred to as the Articles of Organization
  • Obtain an Employment Identification Number (EIN) with the Internal Revenue Service (IRS). You can also make the optional S-corp election after this stage; consult a tax professional before doing so
  • Re-apply for any necessary business licenses and permits for your new business structure
  • Notify your insurance provider of the change from sole proprietorship to LLC. They will tell you whether or not you need a new business insurance policy
  • Open a new business bank account using your LLC’s name and EIN. (and close the old one!) or upgrade your business information on the existing account. This helps maintain the legal distinction between yourself and your LLC
  • Don’t forget to notify loyal customers of your new business name!

Transitioning to an LLC structure involves several moving parts. You might want to consider the help of legal advisors and experienced tax attorneys to avoid missteps. Get yourself the best personalized help only at Gordon Law Group!

Ready to Make It Official?

Yes, sole proprietorships cost zero pennies to start. But, taking steps to convert to an LLC can help you protect yourself and your personal assets as your business gains steam. Contact Gordon Law Group to help to see if an LLC is right for you!

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