How to Change Your Business Structure from a Sole Proprietorship to an LLC

As you grow, it’s important to remember to separate your personal and professional finances. This is one of the main advantages of having an LLC over a sole proprietorship.


As a business owner, choosing the right entity can be confusing. Although you can start out as a sole proprietor, you may find that switching to an LLC structure would be beneficial as you grow. Having the right business structure in place can help you establish credibility in the marketplace and realize benefits you may not have originally envisioned. The more you grow, the more your business structure can change.

What is the difference between a sole proprietorship and an LLC?

A sole proprietorship is the simplest business structure and isn’t really a legal entity, as you don’t need to register your business name to operate. The owner is directly related to the business and is personally liable for all business debts. You will typically see freelancers, startups, and creatives in this category. Sole proprietors may also have private workspaces or physical establishments. The business owner is solely responsible for all wages and taxes of anyone he hires. There are a few advantages to using this business structure:

  • Easy to train
    This is the cheapest business structure you can create when starting a business. All you need is your EIN, licenses and permits. If this is something you’ve just started or a side job you’re trying to build, this is a good way to go.
  • Name protection
    In most cases, your personal name is also your business name. If you choose to have a different name, you need a DBA (Doing Business As) in your state.
  • Control
    You are the boss and you don’t have to answer to partners or shareholders when it comes to making decisions on behalf of the business. As a sole proprietor, you have flexibility in how you move around.

While it’s easy to start a sole proprietorship, you won’t have liability protection, it will be harder to get credit or business financing, and you may have difficulty tracking your expenses. .

An LLC (Limited Liability Company) helps protect the owner’s personal assets from business debts or claims against the company. This means that if the business is indebted to a creditor, it cannot sue the personal property, home, or car of LLC members. The IRS classifies it as a flow-through entity because business income flows through to LLC members. Profits and losses are reported on their personal tax returns. The benefits of an LLC include:

  • Easy to train
    It’s easy and inexpensive to train with your state. LLCs do not need to have a board of directors, hold meetings for shareholders, or keep minutes of their meetings. This means less paperwork and more flexibility.
  • Taxes
    The LLC is a flow-through entity, which means that it does not have to pay income tax at the corporate level. This avoids double taxation. LLCs can also be an S Corp or a C Corp, which can be more advantageous.
  • Credibility
    LLCs are considered more credible than sole proprietorships because they show that you are willing to invest in legal business registration and want to be taken seriously.

A few disadvantages of an LLC are that it costs more to set up the business and there are costs involved in maintaining legal personality, such as state fees and taxes. Also, you may have problems if you want to transfer ownership, and members should recognize the benefits immediately.

Changing from a sole proprietorship to an LLC

If you are considering turning your sole proprietorship into an LLC, there are three distinct advantages:

  • Limited Liability
    There’s no getting around it – an LLC is a separate legal entity separate from the owner. This provides protection against debt collectors. If you have employees, this protection is necessary because you could be personally liable for something they did as a sole proprietorship.
  • Tax flexibility
    Once you’ve moved from a sole proprietorship to an LLC, you can decide how you want to be taxed. There are several options, including a single member LLC, partnership, C-corp, or S-corp.
  • Funding
    It can be difficult to obtain financing as a sole proprietor, especially when working with a bank or financial entity. As an LLC, banks view you as more credible and less risky than when the business is a sole proprietor. Investors also view LLCs as beneficial because they can trade shares for funding.

Steps to change from a sole proprietorship to an LLC

If you’re willing to take the plunge, it can be complex depending on how things are set up. In most cases, there is a lot of paperwork and knowledge involved, so it is extremely important to use a business attorney or, if the budget does not allow, an online LLC service when changing. Some business owners are astute in these areas. If you feel confident doing the process on your own, here are the steps to do it:

Woman signing a contract; Photo by Karolina Grabowska from Pexels.com.
  • Company name availability
    First you need to check if the name is available. Search your state’s database. If you think it’s something you want to trademark, it’s always best to do a trademark search as well. The worst thing you can do is start using someone else’s name nationally and find out you can’t use it because it’s a registered trademark. Another reason you need your own name is because you don’t want to confuse your customers. Staying away from the risk of confusion is essential.
  • Organization statutes
    When creating an LLC, you must complete the Articles of Organization. This document contains all the basic information about your business. Each state has its own requirements, but they all include your business name, what the business does, your mailing address, the name and address of your registered agent, and information about the owners, officers, and managers of your company.
  • operating agreement
    Although an operating agreement may or may not be required in your state, it is always good to have one in place. This legal document describes the ownership of the society and all the obligations of the members and managers. This comes in handy for big financial and work decisions. Also, if there are any discrepancies in business operations, everyone can defer to the operating agreement.
  • EIN
    The EIN (Employer Identification Number) is like your company’s social security number. It is nine digits and is used to open bank accounts, establish trade credit and pay taxes. This is your company’s legal identifier with the IRS. If you plan to have employees, you will pay their taxes through your EIN.
  • Bank account
    Once you have created the LLC and obtained the EIN, you must immediately open a bank account. This helps establish credibility and should be used for all inbound and outbound financial transactions. You may already have a bank account for your sole proprietorship. Depending on your bank, you may need to open a different account, or they may change your information. If your bank asks you to open a new account, it is important to close the old account and transfer all documents to the new company name.
  • Licenses or permits
    Depending on where your business is located, you may need business licenses or permits. It’s always a good idea to check with your local municipality to make sure you have the correct permits and business licenses to operate legally within their boundaries. Every municipality is different, so what may be required in one may not be in another. The best solution is to check and make sure before making any moves. Depending on the type of business you operate, you may also need a state license to do business. Knowing the regulations can help you stay compliant and avoid potential issues. If you already have licenses as a sole proprietorship, you should try to change them for your new entity or request new ones. You don’t want any associations with your old business structure once you’ve moved to the new one.

As you grow, it’s important to remember to separate your personal and professional finances. This is one of the main advantages of having an LLC over a sole proprietorship. Consulting a business advisor, lawyer or accountant can help you make good business decisions.

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