It's time to make the switch to an LLC when you are ready to earn a profit and grow your business. This is because sole proprietorships are only good for very low-profit/low-risk businesses.
Forming an LLC allows owners to take on risk and grow their business.
By switching from a sole proprietor to LLC you will:
- Increase peace of mind
- Increase credibility
- Protect your savings, car, and house
- Protect your privacy
- Increase business growth
- Allow for accelerated growth
- Allow for greater profit
You've decided to take the next step in growing your business and protecting your personal assets.
These are the steps you will need to take to form your LLC:
- Name Your LLC
- Choose an LLC Registered Agent
- File Your LLC's Articles of Organization
- Create an LLC Operating Agreement
- Get an EIN
Using an LLC formation service is helpful for converting sole proprietorships to LLCs. We usually recommend using a formation service because the free year of registered agent service that is included is worth 2-3x what it costs to form the LLC.
Step 1: Name Your LLC
First, you must give your business a unique name—one that's distinguishable from all other business names in your state. Our LLC Name Search guide is helpful here.
DBA Transfer
You might already have a DBA name for your sole proprietorship (or partnership) that you will want to carry over to your new LLC. The steps for transferring or converting a DBA name vary from state to state.
You may also need to contact your state for specific directions on how to transfer your DBA registration. You can find your state's contact information on our Form an LLC guides.
Business Naming Help
Our Business Name Generator and our How to Name a Business guide are free tools available to entrepreneurs that need help naming their business.
Step 2: Choose a Registered Agent
Your LLC registered agent accepts legal documents and tax notices on your LLC's behalf. You will list your registered agent when you file your Articles of Organization.
Step 3: File Your Articles of Organization
The Articles of Organization, also known as a certificate of formation or a certificate of organization in some states, is the document you'll file to register your LLC with the state.
Step 4: Create an Operating Agreement
An LLC operating agreement is a legal document that will outline the ownership and member duties of your LLC.
Step 5: Get a New EIN or 'Transfer Existing EIN
Get an EIN
An Employer Identification Number (EIN) is a number that is used by the US Internal Revenue Service (IRS) to identify and tax businesses. It is essentially a Social Security number for a business.
EINs are free when you apply directly with the IRS. Visit our EIN guide for instructions for getting your free EIN.
Transfer an EIN
According to the IRS, sole proprietors that incorporate (eg., form an LLC or corporation in IRS language), must get a new EIN.
LLCs offer more protection, tax benefits, and other advantages that make them worth considering as business entities.
If you currently own a sole proprietorship and wonder whether you can change it to a limited liability company (LLC), the simple answer is yes.
A deeper question underlying this simple query involves when a change from a sole proprietorship to an LLC might be advisable. You might also want to know what procedures to follow to make the change from a sole proprietorship to an LLC, as well as what your new responsibilities include as the owner of an LLC.
Why Change a Sole Proprietorship to an LLC
One of an LLC's main benefits is that this type of business entity offers its owners limited liability. By separating your personal assets from the business, you protect your own property and ensure that the business's debts remain those of the LLC. That is, you are not personally liable for them.
Because of the limited liability concept, you may consider switching from a sole proprietorship to an LLC if you're concerned about your personal property being subject to a lawsuit against your business. If you do not want your personal car or bank account to be potentially at risk in lawsuits against your business, for example, an LLC could be a better option.
That said, not every sole proprietorship can elect to become an LLC. In some states, certain licensed professionals—such as attorneys—are prohibited from forming LLCs and instead must organize their businesses as different types of entities. In other states, although those professionals may form an LLC, their personal property may not be protected from malpractice claims.
How to Change a Sole Proprietorship to an LLC
As individual states govern business entities, you must follow your state's procedures for changing a sole proprietorship to an LLC. Generally speaking, the process requires filing the same paperwork as anyone else creating a new LLC.
You may have to cancel your sole proprietorship's trade name or Doing Business As (DBA) before you can form an LLC. You may or may not be able to keep your same name depending on state naming laws.
Like any LLC, you must select a registered agent, file articles of organization, and draft an operating agreement. To get the business set up for taxes, you must apply for an Employer Identification Number (EIN).
Beyond that, you must be sure that you update all of your sole proprietorship bank accounts, contracts, and any registrations, such as trademarks and business licenses and permits, so that your new enterprise is named in them.
Responsibilities as an LLC Owner
When changing from a sole proprietorship to an LLC, you must examine existing contracts carefully. Depending on the contractual language, you may or may not be able to assign the responsibilities you had as a sole proprietor to the LLC. If the contract doesn't allow for this, you must discuss the arrangement with the other party.
Your responsibilities as an LLC owner to the LLC itself should be detailed in the LLC's operating agreement. Overall, though, as an owner, you have a duty of care that requires you to act in good faith and exercise reasonable care in carrying out your responsibilities concerning the LLC.
You must treat the LLC as a separate entity—including keeping all personal assets separate—otherwise, you risk losing the protection of limited liability.
Changing from a sole proprietorship to an LLC may be a smart move for your business as well as for the protection of your personal assets. Still, you should be aware that you could end up paying more in taxes and fees with an LLC than you would have if you had stayed a sole proprietor. Because there are so many individualized considerations involved in making this decision, professional legal advice is recommended.