How to Change Your Sole Proprietorship to an LLC

Most businesses start as a sole proprietorship since it is the default business structure. At some point a sole proprietorship might want to expand and change how the business is structured. A wise choice would be to convert your business from a sole proprietorship to an LLC. It can be easy to convert your business and today we will discuss how you can do that.

Name Your LLC

You need to come up with name for your LLC because when you change from sole proprietorship to an LLC, you are creating a new company. A sole proprietorship runs as single entity, and an LLC is a separate entity, so you need to have a new name.

Once you have come up with a name, check if it is available by contacting your state’s secretary of state office. When you find out that it is available make sure it does not infringe on anyone’s trademark. Your business name needs to include “Limited Liability Company” or “LLC” or “Ltd.”.

File Your LLC With the State

You need to next file the paperwork with your state office which is called the Articles of Organization. The information you need includes:

  • The name and address of your LLC
  • The purpose of your LLC
  • The name and address of your registered agent (who receives all documents related to the state)
  • The management structure of your company

Create an LLC Operating Agreement

LLC’s need to have an operating agreement to outline how the business will be run. The following is included in an operating agreement:

  • How the business was created
  • How the business is managed
  • How many was raised to fund the business
  • How members will divide and share financial and physical assets

Not all states require an operating agreement, but it is important to have one.

Register LLC With the IRS

You will need to apply for a new EIN (employee identification number) with the IRS when you form your LLC. By doing so you will crate a new entity for the IRS and you can select the tax classification is right for you. An EIN is used to open business bank accounts, filing taxes, obtaining business credit and more.

Set Up a Bank Account

You need to separate yourself as an owner from the business and it is important that you keep your personal finances clear from your business financials. You need to apply for a new bank account for the new company using your new EIN. Remember to close the old account for your sole proprietorship.

Apply for Business Licenses and Permits

When your business structure changes, some states require you to reapply for business licenses. Some licenses and permits you could need are professional license, reseller’s permit or health department permit. Again, check with your state to find out which ones apply to your business.

Benefits of an LLC

There are many benefits of having an LLC because it is one of the most flexible business entities. The following are a few examples of the amazing benefits of an LLC:

  • Personal liability protection
  • Business liability protection
  • No restrictions on ownership
  • No restrictions on management
  • Flexible tax status
  • No separate tax returns
  • No double taxation