How to Change From Sole Proprietor to Incorporation

By John Cromwell

While a sole proprietorship and corporation are both business entities, there are vast differences between the two. Choosing the correct form for your business’s needs is essential. A sole proprietorship is just an extension of the business owner. Establishing a sole proprietorship does not require registering with the state -- and the owner is personally liable for all the business’s obligations. A corporation is legally distinct from its owners, who are generally not personally liable for the business’s liabilities. Forming a corporation, however, requires registration with the state.

While a sole proprietorship and corporation are both business entities, there are vast differences between the two. Choosing the correct form for your business’s needs is essential. A sole proprietorship is just an extension of the business owner. Establishing a sole proprietorship does not require registering with the state -- and the owner is personally liable for all the business’s obligations. A corporation is legally distinct from its owners, who are generally not personally liable for the business’s liabilities. Forming a corporation, however, requires registration with the state.

Step 1

Choose a name for the corporation that conforms to your state’s rules. The name of your business must include a corporate designation such as “corporation, “incorporated,” or “limited.” The name cannot suggest that the corporation is affiliated with the federal government or a restricted type of business like a bank. No two corporations in a state can have the exact same name. Most states have an online database that allows you to see if your chosen name is available.

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Step 2

Choose a registered agent. A registered agent is a person or entity who receives “service of process” for the business. All legal communications go to the registered agent. This includes summonses, notices of lawsuits and license renewal documents. A registered agent generally must reside in the state where the business is located -- and must be available at that location during normal business hours. An officer or partner in the corporation can assume the role of registered agent, as can the business's attorney or a service company.

Step 3

Obtain an articles of incorporation form. You can generally obtain this form from your state’s secretary of state website. Complete the articles of incorporation and file the form with the state. Be sure to include the identity and address of the registered agent. You must submit the form to the secretary of state, or similar state office, and pay required fee. Alternatively, you can use an online legal document provider to prepare and file the articles of incorporation for you.

Step 4

Capitalize your interest in the corporation by transferring the sole proprietorship’s assets to the corporation. The sole proprietor’s assets are your initial investment in the corporation. To transfer land, you will need to draft a deed signifying that you transfer the land from yourself to the corporation. You generally must file the deed with the recorder’s office in the county where the property is located. For personal property, execute a bill of sale. The bill of sale should show what you received from the corporation in exchange for the property. Generally, you will receive shares of stock.

Step 5

Apply for an Employer Identification Number. This number is how the corporation identifies itself to the IRS on its tax return; it is the equivalent of a person’s Social Security number. You can immediately obtain an EIN for your corporation by completing an online form on the IRS website.

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How to File Articles of Incorporation in California

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