How to Convert a Sole Proprietorship to an LLC

When you convert your sole proprietorship to an LLC, you formalize the business and enjoy limited liability.

By , Attorney
Need Professional Help? Talk to a Business Law Attorney.

There was a problem with the submission. Please refresh the page and try again
Full Name is required
Email is required
Please add a valid Email
Phone Number is required
Please enter a valid Phone Number
Zip Code is required
Please add a valid Zip Code
Description is required
By clicking "Find a Lawyer", you agree to the Martindale-Nolo Texting Terms. Martindale-Nolo and up to 5 participating attorneys may contact you on the number you provided for marketing purposes, discuss available services, etc. Messages may be sent using pre-recorded messages, auto-dialer or other automated technology. You are not required to provide consent as a condition of service. Attorneys have the option, but are not required, to send text messages to you. You will receive up to 2 messages per week from Martindale-Nolo. Frequency from attorney may vary. Message and data rates may apply. Your number will be held in accordance with our Privacy Policy.

You should not send any sensitive or confidential information through this site. Any information sent through this site does not create an attorney-client relationship and may not be treated as privileged or confidential. The lawyer or law firm you are contacting is not required to, and may choose not to, accept you as a client. The Internet is not necessarily secure and emails sent through this site could be intercepted or read by third parties.

Protect Your Business

Create your LLC with Nolo

To convert a sole proprietorship to a limited liability company (LLC), you'll file the same paperwork as you would if you had created the LLC from scratch. You'll also update sole proprietorship registrations (including business permits, licenses, and trade name registrations), bank accounts, and contracts to reflect the change. Becoming an LLC offers you a number of benefits, including protecting your personal assets from the debts of the business and adding credibility to your business by communicating to vendors and customers that you own a formally registered company. However, an LLC is not an option for every company, and converting to that structure might mean you will pay more taxes and fees than had you stayed a sole proprietorship.

Advantages of an LLC

As soon as you begin doing business by yourself (and in some states, with your spouse), you have a sole proprietorship. In the eyes of the law, the sole proprietorship and the owner are one and the same. When the business owes a debt, so does the owner. If someone brings a lawsuit against a sole proprietorship, it is the same as suing the owner. The owner's personal assets like his car and bank account, are on the line to satisfy the debts of the business.

An LLC is its own business entity, separate from the owner. The LLC does not exist until the owner forms it with the state. The LLC owns property and enters into contracts. This business structure provides limited liability protection for the owner, which means that owners are not personally responsible for the debts of the business. Creditors sue the LLC, not the owner, and the amount they can collect is limited to the assets of the LLC.

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.

Disadvantages and Limitations of an LLC

Converting to an LLC takes time and might cost you more money than continuing your business as a sole proprietorship. You will not owe additional federal taxes unless you elect C Corporation tax status. However, your state might have filing fees, annual fees, and other state business taxes you did not pay as a sole proprietorship.

Not every type of business can form an LLC. In some states, licensed professionals such as attorneys and accountants cannot form LLCs (instead, they're typically organized as professional companies). In states where professionals can form LLCs, the LLC might not protect their personal assets from malpractice claims. For more information, see Forming a Professional LLC.

Steps to Convert Your Business to an LLC

To change your business from a sole proprietorship to an LLC, you must create an LLC according to the laws of your state, and update your sole proprietorship registrations and accounts. The steps include:

  1. Dissolving or canceling any registered Fictitious Business Names or Doing Business As (DBAs) for your sole proprietorship, if you intend to continue using the same tradename. Some states allow you to register an LLC with the same tradename (so long as the owner is the same on both registrations), while most states require you to cancel the registration under your sole proprietorship before forming the LLC.
  2. Choosing a business name that complies with your state's laws, which might mean changing or updating your current name. The name must be different from any business name already registered, which you can verify by using your state's business search tool. Many states require LLCs to include "limited liability company," "LLC," or another abbreviation in the name.
  3. Selecting a registered agent, which is the individual who will receive governmental notices on behalf of the company. You can list your name or use a registered agent service.
  4. Filing Articles of Organization, also known as a Certificate of Incorporation or Formation, with your Secretary of State and paying the filing fee.
  5. Drafting an operating agreement, which is an internal document that outlines how you will manage your LLC.
  6. Applying for an Employer Identification Number (EIN). If your sole proprietorship used an EIN, you will need a new number after forming an LLC.
  7. Opening a bank account or changing your bank account information.
  8. Contacting licensing agencies to update your information and verify that your registrations and licenses apply to your LLC.
  9. Updating business information on all marketing materials, such as your website and business cards.
  10. Reviewing your current contracts with vendors and customers and changing the party to the contract (from your name to the LLC name).

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 (such as filing annual reports and creating and following an operating agreement), 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.

Start Your LLC Today

Protect Your Business With Nolo.