When to Convert A Business From A Sole Proprietorship To An LLC
It is time to go from a sole proprietorship to an LLC when you are serious about growing your business and earning a profit.
Sole proprietorships are only good for very low-profit/low-risk businesses.
Example: A sole proprietorship can be a good way to start out if you are doing business on a small scale or want to try out a low-risk venture to see how successful it will be.
Forming an LLC allows business owners to grow their businesses and take on risk. This is because LLCs provide personal liability protection.
What is personal liability protection? When a business owner has personal liability protection, they can’t be held personally responsible if the business suffers a loss. This means personal assets (car, house, and bank account) are protected.
Why You Should Form an LLC
There are several benefits to starting an LLC that may or may not matter to a business owner. But, regardless of any other factor, a business owner needs to form an LLC when they start to earn a profit or carry risk.
This is because profit and risk open the door to liability. A sole proprietor's personal assets are completely exposed to creditors and lawsuits because legally, the sole proprietor is the business. In an LLC, the business can be legally separate from the business owner.
By changing your business from a sole proprietor to LLC you will:
- Protect your savings, car, and house
- Increase your peace of mind
- Protect your privacy
- Increase business growth
- Allow for greater profit
- Allow for accelerated growth
- Increase credibility
Steps To Convert Your Business To An LLC
When you form your LLC, you will need to complete these steps:
- Name Your LLC
- Choose an LLC Registered Agent
- File Your LLC's Articles of Organization
- Create an LLC Operating Agreement
- Get an EIN
Step 1: Name Your LLC
You will need to provide your state with a unique name that is distinguishable from all registered names when you file your LLCs formation documents.
You may 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.
We recommend selecting your state on our Form an LLC guide to learn more about searching and registering your business name.
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 guides.
Step 2: Choose an LLC Registered Agent
Your LLC registered agent will accept legal documents and tax notices on your LLC's behalf. You will list your registered agent when you file your LLC's Articles of Organization.
Step 3: File Your LLC's 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 will file to officially register an LLC with the state.
Step 4: Create an LLC Operating Agreement
An LLC operating agreement is a legal document that outlines 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.