How to Transfer Liability From a Sole Proprietorship to a Corporation

by Terry Walcott
The switch from proprietorship to a corporation makes sense for an owner who wishes to avoid personal liability.

The switch from proprietorship to a corporation makes sense for an owner who wishes to avoid personal liability.

Jupiterimages/Goodshoot/Getty Images

A sole proprietorship is a business operated by a single individual and is not registered with any state as a corporate or limited liability entity. A sole proprietorship is easy to set up and maintain, but its major drawback is that the owner-operator is personally liable for the debts and obligations of the business. In contrast, a corporation is a business operated by one or more persons who are registered with the state; a corporation protects its owners from personal liability for company debts and obligations. Thus, most owners of sole proprietorships eventually convert, or consider converting, their businesses to corporations to avoid personal liability.

Ready to start your LLC? Start an LLC Online Now

Step 1

Dissolve the sole proprietorship. If the sole proprietorship is registered with or licensed by a state or local authority, the sole proprietorship must be dissolved before liability can be transferred to a corporation. Dissolution is not necessary for unregistered sole proprietorships, because liability will automatically transfer when the new corporation is registered. Dissolution can usually be accomplished by filing a notice of dissolution with the county clerk.

Step 2

Check the Secretary of State’s online database to determine if the name of the sole proprietorship is available. If the sole proprietorship is already registered with the state as a “Doing Business As” entity, that registered business name may be used as the name of the new corporation. Notify the state registrar of your plans to use the DBA as the corporate name.

Step 3

Download the articles of incorporation template from the Secretary of State’s website, complete the required information, file the completed articles of incorporation and pay the required registration fees. All states allow filings by mail and some allow filings by fax. The articles of incorporation set out the purpose and location of the business, name of the incorporator and number of shares authorized to be issued. The corporation goes into existence once the articles of incorporation are registered.

Step 4

Appoint a local registered agent in the state of incorporation. The agent will receive official correspondence and accept service of court papers. Registered agents are required by all states, and can be individuals or approved companies. The corporation itself can serve as its own registered agent if it is located or conducts business within the state of incorporation.

Step 5

Elect the corporation’s board of directors to oversee company management and convene a board meeting for the purpose of adopting corporate bylaws. The bylaws are a corporate blueprint which outline the organizational structure, rights and powers of shareholders, directors and officers, and how directors and officers are nominated or elected. The bylaws also set out how shareholder disputes are to be resolved.

Step 6

Close the sole proprietorship Employer Identification Number (EIN) tax account with the Internal Revenue Service (IRS) if you have one, and replace it with a new EIN for the new corporation. IRS Form SS-4 must be completed and filed to obtain an EIN, and this can be done online, via postal mail or by fax. Convert all business accounts from the sole proprietorship into the name of the corporation.