Sole Proprietor to LLC: Can You Make the Transition?

Sole proprietorships are the perfect structure for building the foundation of your business. Most successful entrepreneurs started their journey as sole proprietors. However, this straightforward structure comes with several limitations. 

As your business grows and evolves, its needs will also change and adjust down the line. You’ll have to consider changing your business entity into something more suitable to your growing venture, like a limited liability company (LLC).

This blog will explore how to change a sole proprietorship into an LLC. We’ll also discuss the signs you must look for to know when it’s the right time to transition.

Read on to learn how a sole proprietor can be an LLC and how you can secure the long-term growth and success of your business. 

Knowing The Difference: Sole Proprietorships Vs. LLCs

Before discussing whether a sole proprietor can be an LLC owner, let’s first explore the difference between these popular structures. 

A sole proprietorship is a business entity owned and operated by a single owner or a sole proprietor. It’s the simplest form of business organization that you can get. 

Under this entity, the owner and the business share one legal entity. As a sole proprietor, you will be responsible for all aspects of the business, including its debts and legal obligations.

On the other hand, a limited liability company (LLC) is a structure that combines the elements of a partnership and a corporation. Unlike sole proprietorships, LLCs have their distinct legal entities. 

Their owners will not be responsible for the company’s liabilities, providing significant asset protection. This separation is what makes LLCs popular among entrepreneurs.

While sole proprietorships are excellent for aspiring business owners, LLCs offer a higher level of protection against the pitfalls of entrepreneurship.

Can A Sole Proprietor Be An LLC Owner?

The short answer is yes; a sole proprietor can be an LLC owner. Businesses can modify their business entities at any given time. But how do you know when is the right time to convert your sole proprietorship into an LLC?

Here are three signs that indicate it might be time to consider changing your structure:

You Want to Hire Employees

If you’re at a point where you need employees to help you, now is a good time to make the switch.

While it’s true that sole proprietors can hire employees, the pass-through tax status of LLCs makes it easier for you to manage employee compensation and taxes.

You Want to Protect Your Personal Assets

The bigger your business gets, the more exposed it becomes to debts, lawsuits, and other liabilities.Once your business gains momentum, you’ll be at a higher risk. 

With this in mind, you should convert to an entity that provides you with asset protection, like an LLC. This way, you can rest easy knowing your assets are protected from legal and financial challenges.

You Need More Funding

The capacity of sole proprietors to raise capital is limited. Lenders see sole proprietorships as risky since they don’t have a separate legal entity like LLCs and corporations. You’ll have a harder time securing loans as a sole proprietor than an LLC owner.

How to Convert Your Sole Proprietorship to An LLC 

If you think that now’s the right time to make the switch, here’s what you need to do to turn your sole proprietorship into an LLC:

Check your name

The first thing you need to do when converting your sole proprietorship is to check your name if it’s available to use as an LLC name. Each state has its own database for business names that you can use to check if you need to change your name. 

Find A Registered Agent

Unlike sole proprietorships and general partnerships, all LLCs nationwide must have a registered agent.

A registered agent is someone who receives legal correspondence on your behalf. They’re responsible for ensuring you don’t lose all important documents, such as legal notices, lawsuits, and official government communications addressed to your business. 

The requirements for registered agents vary from one state to another. So, before you assign an employee or hire a registered agent, ensure they meet your state’s qualifications. 

File Your Articles of Organization

Once you hire your registered agent, you must file your LLC’s Articles of Organization with your Secretary of State. It should include the following information about your business:

• Name and address of your LLC
• Purpose of your LLC
• Name and address of your registered agent
• Management structure

After you file your organizational documents, it’s vital that you check which business permits you need to start your operations. 

Create Your Operating Agreement

Certain states require LLCs to create an Operating Agreement. However, it would be best to have one even if your state doesn’t require it. 

Operating agreements are designed to outline the rules and regulations governing your operations. It ensures that all members of the LLC are on the same page regarding the company’s management and decision-making processes. 

Get Your Employer Identification Number (EIN)

Lastly, you must get an Employer Identification Number (EIN) from the IRS. You will need an EIN to hire employees, open bank accounts, and transact with vendors.

Convert Your Sole Proprietorship Today

In conclusion, sole proprietorships are the perfect starting point for aspiring entrepreneurs like you. However, the limitations of this structure may hinder your business from reaching its true potential. 

Converting your sole proprietorship into an LLC is a strategic move that will help you expand and secure the future of your business. 

If you need help changing your sole proprietorship’s entity, look no further than NCH. 

NCH is a Nevada-based business formation service provider. Our business specialists offer you comprehensive support and guidance throughout the conversion process. We will help you complete your organizational documents and ensure that you file them on time. 

With NCH by your side, you can guarantee the transition will be smooth and easy. Give your business the support it needs to grow and let NCH help you convert your sole proprietorship today. 

To learn more about our services, visit our website here or call us at 1-800-508-1729.

Disclaimer: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.