Are you thinking about changing your sole proprietorship to a limited liability company (LLC)? If so, you’re in good company. The LLC is one of the most popular formation types for small business owners. This structure offers a range of potential benefits, from its flexible management options to the ability to separate personal assets and liabilities from those of your business.
While the prospect of officially forming an LLC may seem daunting, we’re here to help. Keep reading to discover step-by-step directions for converting your sole proprietorship to an LLC. We’ll also explore how our products and services can help cut through the red tape and handle the process for you. Because with us, you never have to go it alone.
Before we dive into the steps, let’s take a quick look at why a sole proprietor might opt to form an LLC.
A sole proprietorship is an unincorporated business with only one owner. This type of business is also sometimes referred to as a “sole trader” or a “proprietorship.”
Forming a sole proprietorship doesn’t require filing any official documents with the state. Generally speaking, if you’re selling something or providing a professional service, you’re probably already considered a sole proprietor. Learn more about the definition of a sole proprietorship.
A limited liability company (LLC) is a business structure in which the business is a separate legal entity from its owners (which are called “members”). This formation type involves filing formation documents with the Secretary of State. Learn more about the definition of an LLC.
As their businesses grow, many sole proprietors opt to officially form their business as an LLC. The benefits of changing from a sole proprietorship to an LLC include:
Changing your sole prop to an LLC involves officially registering your business as a limited liability company with the state. This means giving your business a name, filing formation documents with the Secretary of State, appointing a registered agent, drafting an operating agreement, and obtaining an EIN.
Below, we’ll cover each step in detail.
The first step to forming an LLC is to name your business. As a sole prop, your business name was probably the same as your personal name. But with an LLC, you’ll want an official company name that conveys legitimacy and captures your desired branding tone. Be sure to choose a name that you’ll want to stick with long-term. It’s also a good idea to choose a name that makes it clear what types of products and/or services you offer.
Most importantly, you’ll need to adhere to the guidelines of the state in which you’re registering your business. While each state has slight variances in its rules, they all require limited liability companies to include some sort of LLC designator at the end of the company name. A few common LLC designators are:
Again, different states have different rules surrounding which LLC designators are required/allowed. Be sure to check with the Secretary of State in your state for specific guidelines.
Most states also prohibit the use of words that suggest your LLC is a legal, banking, or government entity. Profanity and vulgar language are also typically disallowed.
Your LLCs name must be distinguishable from any other business names in the state. Use our state-specific business entity search page to determine if your desired name is available. For example, you can check here to search for business entities in California.
If your sole proprietorship has a “doing business as” (DBA) name (also known as a trade name, assumed name, or fictitious name depending on your state), you may not be able to continue using it when you form your LLC. DBA laws vary widely by state. If your state allows DBAs and LLCs to share the same name and your DBA is the same as an existing LLC’s name, you’ll need to find a new name for your LLC before you file your paperwork with the state. No state allows two LLCs to share the same name.
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All LLCs are required to appoint a registered agent. A registered agent is an individual or business entity who receives legal notices on behalf of your business. In some states, this is also called an “agent for service of process,” “statutory agent,” or “resident agent.”
Again, rules vary by state, but the general requirements for serving as an agent for service of process include:
While you can legally serve as your business’s registered agent yourself in most states, this is not advisable. Just a few of the potential pitfalls of doing so include:
These reasons are why many LLC owners choose to go with a professional registered agent service like ours. With our professional services, you can:
To officially register your company as an LLC, you’ll need to file Articles of Organization with the Secretary of State. This document sets your company up as an LLC in the state where you’re registering your business.
Depending on the state, a few other names for Articles of Organization include “Certificate of Organization” and “Certificate of Formation.”
While this form can differ from state-to-state, some of the information you will typically provide on your formation documents includes:
In most states, you can file your Articles of Organization online, in person, by mail, or via fax. When filing your formation documents, you will also include your state filing fee and any additional fees (such as expedited filing fees). Learn more about LLC filing fees by state.
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To lay out how your LLC will be managed and run, you’ll need to create an operating agreement. While most states do not require this document by law, it is an important step in organizing your LLC. This is especially true when you’re going from a sole proprietorship to an LLC, as one of the main reasons you’re making this change is probably to add more structure to your business.
An LLC operating agreement includes all of the pertinent details about how your LLC will be run, such as:
Even if you’re a single-member LLC, an operating agreement is an important legal document for you to create. For example, many banks won’t let you get a business bank account without one. And, if someone sued your LLC, an operating agreement helps further demonstrate to the court that your LLC is a separate entity from you.
Need some help? Use our interactive operating agreement template to make sure you don’t leave out a single detail.
Register your LLC with the federal government by getting an Employer Identification Number (EIN). Much like a Social Security Number (SSN) does for individuals and sole proprietors, your new Employer Identification Number identifies your LLC to the Internal Revenue Service (IRS).
An EIN is also sometimes referred to as a Federal Employer Identification Number (FEIN). This is the number you’ll use to file tax returns, open a business bank account, and conduct other activity for your business.
As with every other step in this process, we can also help you obtain your EIN with our EIN service.
Note: Once you obtain an EIN, you can open a new business bank account. Your new bank account is crucial to separate your personal assets and expenses from your business expenses. You may also want to get a business credit card to keep personal finances and debts separate from those of your business.
As you’ve read, there are several steps that you need to follow when changing your sole proprietorship to an LLC. If you want to make everything easier on yourself, you can use professional services like ours to handle the heavy lifting.
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LLCs are treated as pass-through entities by the Internal Revenue Service (IRS). That means the LLC, itself, does not pay taxes. Instead, the owners (members) pay taxes on their portion of the business income on their own personal tax return.
As we mentioned before, the IRS treats single-member LLCs as sole proprietorships, by default, and multi-member LLCs as general partnerships. However, you can also opt to be taxed as a C corporation or S corporation, depending on what circumstances are most favorable for your business structure.
While specific rules and requirements vary by state, some of the taxes LLC members typically pay include:
Other requirements you should research include your state’s excise tax filing requirement and whether there’s a franchise tax in your state. Learn more about small businesses and taxes.
If you want to conduct business under a different moniker than your official company name, you’ll want to apply for a “doing business as” or DBA name. This is also sometimes referred to as a “fictitious name” or “assumed name.”
Examples of when a DBA name would be used include:
The process for applying for a DBA name involves conducting a search to make sure the name is available (just like you did when naming your LLC). If the DBA name you want is available, you can then register it. Luckily, we can help with this too!
Just because a business name appears to be available when you do a business entity search, that doesn’t mean you are fully clear to use it. Names can also be trademarked at both the state and federal level.
In order to conduct a state-wide trademark search, you can check with your state’s Secretary of State database. To search at the federal level, consult the United States Patent and Trademark Office (USPTO).
There are a variety of business licenses and permits that you may need for your LLC. Requirements can vary by both state and industry. Use our business license report to get a summarized report of the licenses your business needs to operate at the local, county, state, or federal levels.
Incorporation is the legal process of forming a company. When you change your sole proprietorship to an officially registered business structure, such as an LLC or a corporation, you are incorporating your business. Not sure which formation type is right for you? Learn more about LLCs vs. corporations.
If you want a centralized place for handling everything from invoices to tracking tax-deductible expenses, try ZenBusiness Money. This innovative platform enables you to:
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