Can You Change a Sole Proprietorship to an LLC?

By Laura Payet

Can You Change a Sole Proprietorship to an LLC?

By Laura Payet

Many entrepreneurs eventually change a sole proprietorship to a limited liability company (LLC). Most states don't require formalities or paperwork to operate as a sole proprietor—you simply begin engaging in whatever kind of business you choose. Maybe you're a knitter and begin to sell some of the items you make to friends and at craft shows. Or maybe you create a new app and find a company to buy it.

Woman dressed in white using laptop

After some success, you may feel ready to formalize your business. It's a simple process and often beneficial move to change to an LLC.

Advantages of an LLC

The biggest advantage of an LLC is that it protects you from personal liability for your business's debts. This means that creditors and civil plaintiffs who sue your company cannot go after your personal assets, like your car, home, or bank account. You can obtain the same protection by forming a corporation, but it's easier (and often cheaper) to set up an LLC since they don't have to observe as many formalities as other business structures. For example, there is no requirement for a board of directors, and for that reason, there is no need to hold meetings or keep minutes.

They also enjoy greater tax flexibility. An LLC's options include being taxed as a pass-through entity, just as a sole proprietorship is, or being taxed like a corporation. A tax accountant can help you determine which choice would be better for you.

How to Set Up an LLC

To change your sole proprietorship to an LLC, start by following your state's procedure for setting it up. You can check the Secretary of State's website for your state's process, but in general, the steps are likely to include the following:

  1. Choose a business name. Before doing so, however, you'll have to ensure that it is available for use. Many state departments will have a searchable database of existing business names.
  2. File articles of organization with the appropriate state office.
  3. Prepare an operating agreement, which is a contract describing how to manage the company. A good agreement should address topics such as how to add or remove members, the percentage of ownership, bankruptcy provisions, and how the owners will share in profits and losses. ownership share, how member bankruptcy will affect the company, who is responsible for management, and how members will share profits and losses. Even if you operate a single-member LLC (meaning that you are the sole owner), it is still a good idea to draft this type of document.
  4. Register with the IRS for a tax identification number, also known as an Employer Identification Number (EIN). You will use this number when filing taxes, opening a business bank account, and obtaining a business loan. You'll also need it if you ever hire employees. If you already have an EIN for your sole proprietorship, you should get a new one for the LLC.
  5. Open a bank account in the company's name. If you have an existing business account, close it.

Additional Steps

If you filed a DBA (doing-business-as) certificate with your state or city in order to operate under a fictitious name, cancel it once your LLC is ready. If your profession calls for a license or permit, you may need to reapply for one in the new entity name. Also, keep in mind that it's important to maintain a strict separation between your company's finances and your own. If you fail to treat the company properly as a separate entity, you could lose your liability protection.

If an LLC sounds like the right option for you, follow these steps when converting from a sole proprietorship. To find out what fees might be required, you can visit your Secretary of State's website.

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.