Can a Startup LLC Assume Sole Propiertor Debts & Assets?

By Stephanie Kurose, J.D.

Can a Startup LLC Assume Sole Propiertor Debts & Assets?

By Stephanie Kurose, J.D.

Startup limited liability companies, or LLCs, can generally assume sole proprietors' debts and assets. Because state law and agreements between LLC members govern financial contributions or withdrawals that could alter ownership interests, the exact circumstances for these types of transactions will vary by state. If you are converting your sole proprietorship into a single-owner LLC, you generally have a lot more leeway than if you are transferring your debts and assets into a multi-member LLC.

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LLC and Sole Proprietorships

LLCs and sole proprietorships are two ways you can structure your business. A sole proprietorships are the simplest way to form a company. In many instances, a sole proprietor does not even have to register his business with the state. The state considers the owner and the business one in the same. Thus, any business income, expenses, debts, and assets are the sole proprietor's personal responsibility.

On the other hand, LLCs are distinct, legal entities separate from of its owners or members. To form an LLC, you must register your business with the state. One of the main characteristics of an LLC is that it provides its members with personal liability protection. Because the business and its members are two independent entities, members generally cannot be held personally responsible for any of the business's debts. Similarly, any business assets belong to the LLC and not the individual members.

Transferring Assets to an LLC

Since a sole proprietor personally owns the assets of his business, he himself can decide to transfer those assets to a startup LLC. The sole proprietor can opt to treat the asset transfer as an equity contribution—which would establish some ownership interest in the LLC—as a sale, or as a lease. If he is treating it as a sale or a lease, the LLC must pay him for the transfer.

Transferring Debts to an LLC

Transferring the debts of a sole proprietorship is not as simple as transferring its assets. Because those business debts are the personal debt of the sole proprietor, if the owner fails to pay, creditors can come after his personal assets, such as his house. Most creditors will not allow those debts to transfer into an LLC's name because it restricts their ability to collect on the debt to just what the LLC owns—since an LLC and its members are legally distinct. However, a creditor may agree to add the LLC to the debt agreement as an additional responsible party; the LLC can then pay the debt and if it doesn't, the creditor can still collect from the sole proprietor personally.

Tax Considerations

When a sole proprietor transfers his assets or debts to an LLC, it can have significant tax implications. Because he is disposing of his personal assets, he must record a gain or a loss on his personal tax return. Before transferring any debts or assets to an LLC, the sole proprietor must know how it would impact his taxes.

If you would like more information on LLCs and sole proprietorships, contact an online service provider today.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.