6 Simple Steps to Transform a Sole Proprietorship to an LLC

6 Simple Steps to Transform a Sole Proprietorship to an LLC
Caitlyn Rose
on March 20, 2020
Read in 2 min

Small businesses often begin as a sole proprietorship because of convenience. The ease of forming a sole proprietorship attracts people who start the self-employed life, but growth over time, the recognition of the liability you face, and other pressures often make creating an LLC necessary and desirable. Sometimes you must have an organizational structure other than sole proprietorship to qualify for contracts. Regardless of what motivates your decision to become an LLC, the following six easy steps will help you get started.

1. Secure the Name of Your Business

Your company must have a unique name when you register it as an LLC. You can search the online database operated by the Office of the Secretary of State for help selecting an available name. You can also call the office of the Secretary of State, or choose to retain a service to get the information you need. If someone else has registered the current name of your business, you will need to modify that name or choose a different one.

2. Submit the Paperwork

You will not have an official LLC until you have submitted the required paperwork to the Office of the Secretary of State. You will likely need to state the nature of your business, your registered agent who will receive official papers about your LLC, and whether members or a manager will manage your company.

3. Meet Other Requirements

Requirements for the formation of an LLC might vary among the states, so check with your Secretary of State to make sure you comply. You might, for example, need to create an operating agreement that lists the owners and managers of your LLC, the percentage of ownership owned by each person on the list, and how you will distribute profits and losses. Even if your state does not require such an agreement, you might want to create one just to avoid future confusion.

4. Get an EIN

Your LLC must get an Employer Identification number (EIN) from the IRS. You can visit the IRS website to request a number online. Even if you don’t have any employees, you will need an EIN for taxes, banking, and credit.

5. Open a Bank Account

Few distinctions exist between sole proprietorships and their owners, so their finances often blend. Now that you have created a separate entity, you must operate it separately from your personal finances. Open a bank account under the name and EIN of you LLC and use it only for business purposes. If you transfer money to or from your LLC, make sure you record them as journal entries in your accounting system. The same applies to any business loans that you may acquire.

6. Operate Legally

Your LLC exist as a legal entity separate from you. Still, you must make sure your company operates by all applicable federal, state, and local laws and regulations. You might need to secure licenses and permits for your operation. The requirements vary based on your location and the type of business you run, so you might need to consult with government officials, industry trade groups, the Chamber of Commerce, or a business attorney to make sure you can legally operate.

Caitlyn Rose Finance Journalist

Caitlyn is a business consultant and writer with an intimate understanding of business finance.

An entrepreneur at heart, she supports small local businesses whenever she can.