How To Change From Sole Proprietorship To Llc
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There comes a time in many a sole proprietors life when they need to formalize their business.
Often its because their side-hustle has grown into a booming full-time business.
And now they , liability protection, funding options, or any of the other advantages an LLC provides.
If thats you and youre wondering if you can and should change to a limited liability company , the answer is yes.
Do I Need A New Ein If I Change From Sole Proprietor To Llc
Yes, if you have an existing Sole Proprietorship with an EIN and you want to change your Sole Proprietorship to an LLC, you will need a new EIN from the IRS. This is regardless of whether or not you have a DBA.
Even though a Single-Member LLC is, by default, taxed like a Sole Proprietorship, the IRS looks at the Sole Proprietorship and the new LLC as two different entities therefore they require that you get a new EIN for your LLC.
There is some confusion about transferring the EIN associated with your Sole Proprietorship to your LLC. Youll often get mixed answers depending on who you speak to at the IRS or what you read online.
However, even if you mail a letter to the IRS requesting that the EIN be transferred from you as a Sole Proprietor to your LLC, the IRS will mail you back a rejection letter.
If you look at the Do You Need a New EIN page on the IRSs website, it says the following for Sole Proprietors:
Sole Proprietors
You will be required to obtain a new EIN if any of the following statements are true:
- You are subject to a bankruptcy proceeding.
- You incorporate.
- You take in partners and operate as a partnership.
- You purchase or inherit an existing business that you operate as a sole proprietorship.
You will not be required to obtain a new EIN if any of the following statements are true:
- You change the name of your business.
- You change your location and/or add other locations.
- You operate multiple businesses.
Maintaining Your Limited Liability Protections
After you change your business to an LLC, treat it as a separate business entity, and not a sole proprietorship. If you blur the lines, you could lose your limited liability protection. Proper maintenance of your LLC means following corporate formalities , and keeping your personal assets separate from the company’s assets. To keep your personal assets separate, transfer ownership of all business property to the LLC, list the LLC as the party on all new contracts, and open a separate bank account for the LLC.
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Change From Sole Proprietorship To Llc: Everything You Need To Know
To change from a sole proprietorship to an LLC, also known as a limited liability company, is almost like starting an entirely new business. 3 min read
To change from a sole proprietorship to an LLC, also known as a limited liability company, is almost like starting an entirely new business. You might have to change your business name, and you’ll be required to file documents and pay fees that you probably didn’t have to worry about before. It can be beneficial to make the change, especially in terms of legally protecting your personal assets.
Set Up Your Llcs Bank Account
When you change from a sole proprietorship to an LLC, you need to separate yourself as an owner from the entity that is your business. Keep your personal finances clear from those your business generates. This is important for compliance purposes, as muddying the financial waters between you and your small business can void the liability protections that made you convert from a sole proprietorship to an LLC in the first place.
If you had a business account for your sole proprietorship, you will need to close that and apply for a bank account for the new company using your new EIN. Doing so will help protect your personal finances and assets in case the business incurs debt or is sued. Banks can have different fees for business accounts, so make sure to shop around to find something suitable for you.
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How Long Does It Take To Convert A Sole Proprietorship To Llc
The process can take just a few days, or it can take up to a month. It depends on factors like the state, the time of year, and whether you have appropriate representation.
I recommend making sure you have a business lawyer on your side, such as myself, to make sure there are no mistakes and that the process gets completed as soon as possible.
Dissolving your sole proprietorship and forming a new LLC can be done in as little as 3-5 business days with the right representation.
You need to decide whether its worth the stress and the hassle of trying to do it yourself to save a few dollars.
A Quick Word About Books And Records
As a sole proprietor, you may or may not have kept business books and records. Even if you haven’t done so, it is wise to start keeping records of your income and expenses so you can prove a history of business transactions.
The complexities of a traditional corporation can be confusing. Converting from a Sole Proprietorship to an LLC may ease administrative burdens, simplify tax filings and limit your liability for business obligations.
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Sole Proprietorship Vs Llc
A sole proprietorship is an unincorporated business that one person owns. It is the easiest way to establish, maintain, and take apart , primarily because of the lack of government regulation. It allows small-scale business owners to try out the business venture. If its a small start-up business, its the only business structure that makes sense.
When mulling over an LLC ownership, keep in mind that the advantage of being a sole proprietor is that, as the owner, you pay personal income tax on the earned profits. But a business owner of a sole proprietorship is not exempt from liabilities incurred by the business. The owners personal assets and savings are at risk in case of legal challenges or if the business incurs debt.
This is where turning a sole proprietorship into an LLC comes into play. The main feature of a limited liability company is that it separates the owners personal assets from the business and, therefore, protects the property, ensuring that the business debt remains with the company. This business structure is between a sole proprietorship and a partnership, allowing for multiple owners .
The requirements for LLCs are minimal, and though they are encouraged to follow the same guidelines as some corporations, they arent legally required to do so.
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Choose Your New Business Name
The first thing you must have to change a sole proprietorship to an LLC is a name for your new business.
You should start by running a business name search in your states database. Even if you used a name as your DBA previously, you must make sure that name is legally available for registration as an LLC.
You may need to cancel or withdraw your sole proprietorships existing DBA name to use it as your LLC name or wrap up loose ends with your old business. Check with your state and county to determine whether to withdraw a DBA name at the start or the end of the process.
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Do I Need A New Ein For My Llc
If you already have an EIN for your Sole Proprietorship, you wont be able to use that for your LLC. Youll need to get a new EIN Number after your new LLC is approved.
If you follow the LLC filing instructions , well provide instructions on how to get a new EIN Number.
For more details, please see: Do I need a new EIN if I change from Sole Proprietor to LLC?
S Corporation Business Operations
There are significant legal differences in terms of formal operational requirements, with S corporations being much more rigidly structured. The numerous internal formalities required for S corporations include strict regulations on adopting corporate bylaws, conducting initial and annual shareholders meetings, keeping and retaining company meeting minutes, and extensive regulations related to issuing stock shares.
Further, an S Corporation may use either accrual or cash basis accounting practices.
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Taxation Of Sole Proprietorships And Llcs
When you own a sole proprietorship, you do not file a separate business tax return, nor do you pay corporate tax. You report the business income and losses on your personal tax return. An LLC has more options when it comes to taxes. By default, after you form an LLC you will continue to pay taxes as a sole proprietor, and you can continue to avoid corporate tax. However, you can file paperwork with the IRS to elect C Corporation or an S Corporation tax status.
Get A Federal Tax Id Number
After establishing a business name and filing your Articles of Organization with your state, its now time to register for a federal tax identification number.
Regulations for business licenses may vary by state, industry, and locality.
There are several ways to get one:
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How To Change From Sole Proprietor To Llc
byMay 4, 2021, 2:34 am21 Views
When you started your business, a sole proprietorship structure was the easiest option. Now that you have more experience, you might wonder if a limited liability company would be a better fit for your business.
A business that operates as a sole proprietor can transition to an LLC, but you cant simply convert a sole proprietorship to an LLC. Instead, you must form an LLC in place of your existing sole proprietorship.
So What Should You Do
If you decide to form an LLC, wait for your LLC to be approved, then apply for a new EIN for your LLC.
Note: In a few states, you actually need to get your EIN before your LLC is filed , however, in most states, you want to wait for your LLC to be approved before applying for your EIN. Check out our how to form an LLC page for instructions on all 50 states.
You dont have to write final return on your Sole Proprietor Schedule C. Youll just file a new Schedule C to report the LLCs income for next tax year. If your Sole Proprietorship has a DBA, you can cancel/withdraw it after your close your Sole Proprietorship.
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Llc Taxation And Fees
Limited liability companies are taxed differently from other corporations. An LLC allows pass-through taxation, which is when the business income or losses pass through the business and are instead recorded on the owner’s personal tax return. As a result, the profits are taxed at the owner’s personal tax rate. A single-member LLC is typically taxed as a sole proprietorship. Any profits, losses, or deductions that are business expenses that reduce taxable income are all reported on the owner’s personal tax return. An LLC with multiple owners would be taxed as a partnership, meaning each owner would report profit and losses on their personal tax return.
LLCs avoid the double taxation to which C corporations must pay because they pass all company income through to the tax returns of the individual owners. A C corporation is a legal structure for a corporation in which the owners, or shareholders, are taxed separately from the entity. C corporations, the most prevalent of corporations, are also subject to corporate income taxation. The taxing of profits from the business is at both corporate and personal levels, creating a double taxation situation.
The fees for establishing an LLC can vary by state but expect to pay nearly $500, which might include the following:
Check Your Business Name
When you are converting a sole proprietorship to an LLC, you need a unique business name. Your current business name might already be registered to another LLC in your state. If thats the case, you cannot operate as an LLC under that name, even if youve been using it as a sole proprietorship.
Check if the name is available by contacting your states secretary of state office. Many states have an online database for registered business names. You can also have a legal professional help you propose a name for your LLC.
Once youre sure no one in your state uses your business name, make sure it doesnt infringe on anyones trademark. Use the United States Patent and Trademark Offices database to search trademarks.
You must include Limited Liability Company in your business name. Or, you can use an abbreviation like LLC, Ltd., or Liability Co.
Usually, you dont need to register your LLC name. The name is automatically registered when you file paperwork to form the LLC. State rules differ, so double check with your state.
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What Are The Responsibilities Of Turning A Sole Proprietorship To Llc
There are many filing responsibilities involved with deciding to change a sole proprietorship to LLC. You will also need to consider the running costs of an LLC, which are usually paid on an annual basis.
Therefore, a sole proprietorship is a good idea for brand new businesses that want to test the waters. They dont have any real responsibilities beyond filing taxes.
So, what are the main responsibilities you must consider?
You must register with the state you operate in. As well as these initial costs, you will usually need to file new paperwork and pay a recurring fee every year to maintain your registration.
There are also state laws you must adhere to. Depending on the state, these can be relatively lax or strict to comply with.
Again, depending on the state, there may be special business licenses and permits you need to operate. These typically must be renewed on an annual basis, which can be costly.
Finally, you must remember to keep records of your companys activities. And these must be separate from any personal projects.
This is a common mistake that entrepreneurs make. They believe that because the IRS doesnt consider an LLC a separate taxable entity there is no need to keep records separate.
That couldnt be further from the truth.
It is also important to remember that your regular filing responsibilities will depend on how you choose the LLC to be taxed.
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. 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 professionalssuch as attorneysare 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.
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Can You Transfer Ownership Of A Sole Proprietorship
Yes, you can do this. The original owner must sell their tangible and intangible assets to transfer responsibility for the business.
However, personal assets and business assets should be clearly defined within the purchasing agreement. Make sure you have a lawyer look over the purchasing agreement to make sure you are buying the entire sole proprietorship and its assets.
If you need assistance with this send me an email at .
How To Change Your Sole Proprietorship To An Llc: 6 Easy Steps
Many small businesses get their start as a sole proprietorship. After all, its the default business structure. If youre a single business owner and never filed any official formation paperwork with the state, then youre operating as a sole proprietorship.
There comes a time when a sole proprietor wants to formalize the business. Perhaps you realized that your side hobby is now a legitimate and blossoming business. Perhaps you realized that operating as a sole proprietorship puts your personal savings and assets at risk should your business incur any debt or be sued. Or maybe you want to take on a new client who requires you to operate as an LLC or corporation.
No matter the reason, the bottom line is its affordable and relatively simple to create a Limited Liability Company . And, there wont be many changes in the way you operate your business. On the plus side, the LLC puts separation between your business and your personal assets and youll have more flexibility in how your business is taxed. You may even change your perception of your business and feel more motivation to see it grow.
If youre interested in forming an LLC, heres the general process. Note that specifics will vary by state, but these six steps will give you a general idea of what to expect.
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