If you’re starting an LLC, the business entity formation process is one of the first and most important hurdles. This step can be terribly complex ...
How to Change from a Sole Proprietorship to an LLC
Written by: Carolyn Young
Carolyn Young is a business writer who focuses on entrepreneurial concepts and the business formation. She has over 25 years of experience in business roles, and has authored several entrepreneurship textbooks.
Edited by: David Lepeska
David has been writing and learning about business, finance and globalization for a quarter-century, starting with a small New York consulting firm in the 1990s.
Updated on April 26, 2023
How to Change from a Sole Proprietorship to an LLC
If your business is growing, you may be considering changing your sole proprietorship to a limited liability company (LLC). LLCs offer several advantages, particularly in terms of personal liability protection. If you’re seeking those benefits, changing your business structure to an LLC is not a difficult process, but there are several steps to follow.
How to Convert a Sole Proprietorship to an LLC
To change from a sole proprietorship to an LLC, follow these steps:
1. Choose Your State
The first step is to choose the state in which you plan to do business, which presumably is the same state where you currently do business. LLC processes and requirements vary by state, so visit your state’s website for details.
Generally, you can form your LLC with an online application. If you plan to have physical locations in more than one state, you will need to register a foreign LLC in the states where you will do business other than your home state.
2. Choose Your LLC Name
The name of a sole proprietorship is your personal name, so you need to choose a name for your LLC. Your business name is extremely important. It should reflect the brand you plan to build, tell customers what you do, and be memorable.
Once you’ve chosen a name, you’ll need to make sure that it’s not already taken. You can do a search on your state’s website, and on other state websites if you’re doing business in more than one state. You should also check the US Patent and Trademark Office to make sure the name hasn’t been trademarked.
3. Choose a Registered Agent
A registered agent is the person or company that sends and receives official government documents on behalf of your LLC. The registered agent can be a member of the LLC, or you can choose a third party such as an attorney, or a company that offers registered agent services.
Most states require you to have a registered agent. The agent must be a resident of the state where you do business, or a corporation authorized to do business in your state.
4. Determine Your Management Structure
There are two types of management structures:
- A Member-Managed LLC is managed by the members of the LLC. This is usually chosen by smaller LLCs with few members who will be involved in various management roles.
- A Manager-Managed LLC is managed by people who are not members of the LLC and are employees of the business. This structure is often used when an LLC is larger and has multiple members.
5. File Articles of Organization
The articles of organization is the form you file to create your LLC. These forms vary by state but can generally be filed online. You’ll need to fill out the LLC name, the name and address of the registered agent, the names of the LLC owners, and in some states, the way the LLC will be managed. Fees are generally around $100.
6. Draft an Operating Agreement
An operating agreement is not usually required but is highly recommended. The operating agreement should clearly define the following:
- The share of each member’s interests in the LLC
- How profits and losses will be allocated to each member
- Each member’s rights and responsibilities
- The management structure and management roles of members
- The voting rights of each member
- Rules for meetings and voting
- What happens when a member sells their interest, becomes disabled, or dies
It’s a good idea to have an attorney’s help when creating your operating agreement so that you can be sure you’re covering all bases to protect all members and avoid future issues.
7. Re-Apply for Business Licenses
Contact the offices that issued your current business licenses to determine which processes you’ll need to go through to change the licenses to your LLC. You may have to re-apply.
8. Obtain an EIN if You Don’t Already Have One
EIN stands for Employer Identification Number and is like a social security number for your business, allowing the IRS to easily identify your business. It is also known as a Federal Tax Identification Number (FTIN), or sometimes for corporations a Tax Identification Number (TIN).
An EIN is required if your LLC has more than one member, if you plan to hire employees, or if you choose to have your LLC taxed as a corporation.
The application is free and can be found on the IRS website. The application is form SS-4, and it can be mailed to the IRS or submitted electronically, and once your information on the application has been validated, the EIN is assigned immediately.
9. Notify Your Insurance Company
You’ll need to notify your insurance company about your new business structure status so they can update your insurance information.
10. Notify Your Bank
You need to at least notify your bank of the change, and you may need to open a new business bank account or change the name on your current business bank account.
11. Notify Your Tax Advisor
Your tax advisor will need to know about your new business structure so that they can advise you about record-keeping for your LLC, as well as what tax status is right for you.
12. File Annual Reports
Your state may require you to file annual reports for your LLC, which may involve a fee. Check your state for requirements.
Changing your sole proprietorship to an LLC is not a difficult process, but many steps are involved and it’s crucial that you do it correctly. You may want to enlist the help of your attorney or professional LLC formation service.
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