Can You Change a Sole Proprietorship to an LLC?

Can You Change a Sole Proprietorship to an LLC?

Many people who have a sole proprietorship decide that they wish to change or to convert to LLC. When converting to LLC or opting for an LLC to run your business, remember that, as a sole proprietorship, you and your business are one entity. You own the business assets personally, the EIN for your business is you, your registration is you – you are your business

Benefits of an LLC

Here is the game changer. The limited liability company (LLC) forms a new legal person. That person is now separate and apart from you. The legal entity has many of the same rights as does a person - for example, it can own property; it can own savings and checking accounts; it can buy and sell property; and it can own and operate a fully functioning business.

You and your company are close, but you are two different entities and since the LLC is a separate person, the LLC absorbs any liability issues. Here’s a quick comparison of a sole proprietorship vs. LLC:

  • When you are doing business as a sole proprietorship, you are personally open to potentially devastating law suits and legal actions. An LLC, however, is separate from you, and so it will be subject to most lawsuits and other legal obligations and penalties, not you.
  • An LLC offers tax advantages over a sole proprietorship, allowing you to structure your business taxes in different ways.
  • Since your LLC is a separate legal entity, a new tax ID number and other paperwork is required. This different from you previously having an EIN as a sole proprietorship, your new LLC must register its very own EIN.
  • More than one person can be an owner, called a member, of an LLC, as where a sole proprietorship only allows a single owner – you. However, a single-member LLC can be used if you’re the only owner. All this means is that you’ll be the only owner, the rest of the rules for an LLC stay in place.

Can You Change a Sole Proprietorship to an LLC?

You can. Every state allows you to form an LLC, when you convert your sole proprietorship to an LLC. To do so, you will have to contact your Secretary of State for the correct forms. there are few things to keep in mind when you convert a sole proprietorship to an LLC:

  • You have to maintain the ‘corporate veil.’ This means you have to make sure your personal property remains separate from the LLC’s property. Most importantly, you need to keep your bank accounts, credit cards, and loans separate. Don’t treat the LLC bank account as a personal checking account.
  • You are still responsible for your personal actions and for taxes. The protections offered by an LLC won’t help you dodge the business’ tax burdens, avoid paying loans you’ve personally guaranteed, or protect you if you commit a crime, for example.
  • There are time limits for proper transfer, specific filing requirements, LLC taxes, and state regulations to meet - all needed to ensure that your LLC is wholly compliant with your state requirements and regulations.

Once you have put those protections into place, your LLC is ready to keep your business - and you - safe.

LegalZoom can help you convert a sole proprietorship to an LLC. Converting to an LLC is fast and easy with LegalZoom.