Are you operating a sole proprietorship, and you want to know how to convert your sole proprietorship to an LLC? That's what we're going to talk about today. You're going to learn the seven things that you need to do when converting your sole proprietorship to an LLC.
We're going to talk about the seven, count them, seven things that you need to do if you're currently operating as a sole proprietorship and you want to switch over to an LLC. So most online entrepreneurs get started as a sole proprietorship. And before you have any revenue or clients or products to sell, it's a relatively quick, easy, inexpensive way to really get your business started. And chances are, if you're in business by yourself, whether it's an online business or a bricks and mortar business or whatever it is, and you're just getting started, and you haven't filed anything with the state or your local municipality, then you're probably a sole proprietorship.
But at some point, you're going to decide that you do want to actually formalize your business structure. And I'm going to presume, I don't like to presume anything, maybe you realized that your formal side hustle is now actually a legitimate business that's making you money. And so it's time to really get serious about what you're doing. Or maybe watch some of my other posts when you realize that by operating as a sole proprietorship, it's not necessarily the best financial move. And it also could put some of your personal assets and investments at risk if your business would ever get sued. Or maybe you've got a client or a brand that you're working with, and they have a requirement that you actually form an LLC or some sort of business entity so that you can work with them.
That happens too. So no matter what the reason that you're trying to form your LLC, the bottom line is that it's actually a relatively painless, inexpensive, and easy thing to do if you know what you're doing. And although there are going to be some corporate formalities along the way when you're operating as an LLC, there's not going to be many other changes to the way you're doing business. So once you get that LLC set up and you've transferred everything over, there's not going to be that much of a difference, but by forming that LLC, you're going to finally be able to formally separate your business from your personal assets. And you're going to also have more flexibility in how your business is operated and taxed.
There's actually a psychological benefit to forming your LLC because once you form that LLC, it gives some legitimacy to the business that you're starting to build and grow. And as a business owner, legitimacy is a big thing. And some people actually need that motivation to really kick them in the pants and get them going in the direction that they need to go. With that backdrop in mind, I think this is important information you need to know about. So here are the seven steps that you need to follow when you're switching from your sole proprietorship over to your LLC. And although these steps may vary from state to state, this is going to give you a general idea of what you can expect if this is what you're trying to do.
Converting Your Sole Proprietorship to an LLC Step #1 – Business Name
All right. Step number one, make sure your business name is available. This is a biggie that a lot of people miss. Now, you may have already filed a DBA in your state. And if you did good for you because you're knowing your name is already available. But if you have not filed a DBA in your state, then you need to do some research and make sure that the name that you want to use for your LLC is actually available. Because if it's not, you're going to waste a lot of time and money filing those articles of organization just to find out that they're going to get rejected because the names aren't available. And chances are they don't like to refund those filing fees, which can be hefty in some states.
Now, if you are actually switching your DBA to an LLC, you want to make sure to amend that DBA as well to reflect the fact that the DBA is now the name of the LLC. And that might include withdrawing the DBA and just filing your LLC, or your state may have some other paperwork that they want you to file for that. If you want to hire my firm to file your LLC for you, we'll include the name search free of charge.
Converting Your Sole Proprietorship to an LLC Step #2 – Articles of Organization
All right. Step two is you actually have to go out and file your articles of organization or your articles of incorporation to form your LLC or your corporation, whatever it is that you decide that you want file. And our recommendation is typically that you're going to do this in the state where you actually are doing business. Don't form it in Nevada or Wyoming or Utah or wherever, just because you think that's the best place to form LLCs. It's always better to form it in your state.
In the articles, you're going to include information like your name, your business address, the registered agent you're using, the business purpose. You're also going to include the information on how your LLC is going to be managed if whether it's going to be member-managed or manager-managed. Here at Hawthorn Law, we actually have a DIY service that allows you to register your LLC in all 50 states.
Converting Your Sole Proprietorship to an LLC Step #3 – Operating Agreement
The third step is you have to draft an operating agreement. I've done several videos about the major mistakes that people make when forming their LLC. And one of them is that they don't actually form an operating agreement or have an operating agreement in place for their LLC. This is a vital document that's going to help to maintain that separateness between your personal and your business assets. And it's also going to keep people from being able to pierce the corporate veil if you do get sued with your business.
So failure to have that operating agreement in place is really a big deal. And it's going to really put your personal assets at stake in the event that you ever do get sued. We include an operating agreement as part of our DIY service. We also have an operating agreement template if you've already formed your LLC, but you don't have an operating agreement yet.
Converting Your Sole Proprietorship to an LLC Step #4 – EIN Number
Now you may have already filed for an EIN when you first started your business as a sole proprietorship. When you start your LLC, you actually have to apply for a new EIN number. And you're going to use this EIN to do things like open your bank account to process your payroll if you've got employees or if you're the employee that you want to process payroll for, to file your taxes and to apply for business credit. So it's really important that you get a new EIN number when you start your LLC.
Converting Your Sole Proprietorship to an LLC Step #5 – Bank Account
And this ties into number five, which is to open a new bank account in the name of the new LLC. Now to do this, you're going to need your filed and recorded articles of incorporation. You're going to need an EIN number, and you're probably going to need a corporate resolution of some sort.
And typically, the banks will have a document like this on file that they'll have you sign as the sole member of the LLC. If you have an operating agreement, they might want to see that, but I've never actually encountered that, but that's possible. So remember, once you formed this LLC, it's really important that you maintain this clear line of distinction between personal and business, and by having a separate business bank account, that's one way to do it. This is going to help to shield your personal assets from the debts and liabilities of the business. So this is really important.
Converting Your Sole Proprietorship to an LLC Step #6 – Business License and Permits
Number six is that you're going to need to reapply for your business license and permits. So, for example, in North Carolina, where I practice law, you actually have to have what's called a privileged license. I actually just got it in the mail the other day.
They want me to re-up it. And sometimes, if you were to switch to a new business or new LLC, you may need to reapply for some of those local permits and licenses. I know when I practiced here in Orlando as well, there were local permits that we had to have to practice law or to operate a business. And so those are going to vary from state to state and city to city and county to county. So you're going to want to check with all your local authorities to make sure that you've got all the right permits and licenses in place to operate your business.
Converting Your Sole Proprietorship to an LLC Step #7 – Contracts
And the last step, number seven, is that you're going to want to redo all your contracts and have them re-executed by your clients and vendors and anyone else that you have a contract in place with. So, for example, if you rent that copy machine, you're going to want to make sure that you go out to the copy machine vendor and say, “Hey, I'm an LLC now. We need to change the contract or sign the contract to the LLC” and see if they'll let you do that.
So this is especially important for clients that you're working with. You may want to have them sign a new contract with your new business entity to let them know that this, the business entity, is who's going to be doing the work for them and not you personally anymore. And so that's the final step, really, to transition everything from a sole proprietorship to an LLC.
All right. So if you're looking for a checklist that covers all these things and actually much more, I put together, several years ago, a business building checklist that is probably three or four pages long. I'll be honest. It's probably a little bit overkill. But it's got everything you need to do from a legal perspective to protect your business online, whether you're an online business or a small business, bricks and mortar, whatever it is. It's going to contain a list of everything that you need to do to make sure your business is legally protected.
So if you missed my video on the common mistakes people make when forming their LLCs, I'll include a link right over here, and go ahead and check that out. Because my goal is hopefully, you're going to save yourself a lot of headache, and you're going to save yourself a lot of time and mistakes that you could be making when forming your LLC. Have a good day!