How to Transfer Liability From a Sole Proprietorship to a Corporation

By Terry Walcott

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.

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.

Ready to start your LLC? Start an LLC Online Now

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.

Ready to start your LLC? Start an LLC Online Now
How Does a Person Become Incorporated?


Related articles

What Is an LLC License?

A limited liability company is a type of business structure that shields the owners of the company from personal liability for the financial dealings of the operation. An LLC does not pay federal taxes since the profits are only reported on the owner's tax return as personal income. The creation of an LLC is governed by state law and members must file certain documents with the appropriate state department to gain approval to operate as an LLC.

Where Is a Corporation Domiciled?

One of the biggest decisions when starting a business is to decide where the corporation will be incorporated. This decision determines the state laws that govern the corporation, which in turn shape the rights of the shareholders, board of directors and corporate officers as well as the rights and remedies relating to creditors. Finally, the choice of where to incorporate will determine the amount of state taxes paid by the corporation, and state tax rates vary greatly. The state of incorporation is the domicile of the corporation.

How to Create a New Company or Subsidiary of an Existing Company

An existing company, or parent, can create a new company as an independent subsidiary at any time with the approval of management. The startup process is the same for the company as it would be for an individual business owner. The parent controls the new company by being its sole shareholder and retaining the exclusive right to appoint the subsidiary's board of directors. Corporations are the most common type of entity that will find it useful to form a subsidiary, but it is also feasible for a limited liability company to own another business entity. Subsidiaries are formed as independent legal entities, which means they are typically organized as either corporations or LLCs.

LLCs, Corporations, Patents, Attorney Help LLCs

Related articles

How to Change an LLC Filing as an S Corp to a Sole Proprietor

A limited liability company, or LLC, is a business structure defined by state law which protects its members from ...

How to Re-Open a Dissolved Company

In theory, corporations can exist forever, but they can also go out of business or be dissolved for other reasons. For ...

The Difference Between Delinquent & Inactive Corporations

Corporations are a popular business type for small and large companies. Formed under state law, corporations provide ...

How to Apply for an LLC in Florida

A limited liability company is a type of business structure in which the owners -- called members in an LLC -- are not ...

Browse by category
Ready to Begin? GET STARTED