Are you running your business under a Sole Proprietorship and looking to transfer your business into an LLC? We have compiled a detailed step by step guide that will help you with “How to Transfer a Sole Proprietorship into an LLC”.
We have provided step by step instructions so please follow each step so you don’t end up making mistakes.
Form an Limited Liability Company(LLC)
First and most important step is to form a LLC. You can either do this yourself or hire an online company such as Rocket Lawyer to set this up for you. Rocket Lawyer offers a free trial and free incorporation if you use their service. So you definitely want to consider using them. We have a detailed review for Rocket Lawyer vs Legal zoom that will help you as well. You will need the following to make sure everything is done properly.
- File for Articles of Organization with Secretary of State
- Membership Agreement
- Statement of Organization
- Membership Certificates
Apply New EIN Under LLC
Apply for Employer Identification Number (EIN) or commonly referred as Tax ID number.
Update State Employment Tax ID
Make sure you update your State Tax ID(Example in CA Employment Development Department EDD) and let them know that you have changed your entity type from Sole Proprietor ship to an LLC.
Depending upon the State, you may be allowed to keep the same State Tax ID number and Some states may issue you a new Tax ID.
File for Fictitious Business Name(DBA)
Obtain fictitious business name (if using a DBA). You can do this by visiting County Clerks office.
Make sure you provide a copy of your Article and sometimes Minutes and Statement of Info is required.
Open Business Bank Account
Once you open an LLC you are required to open a separate business bank account. We recommend you do not commingle your personal finances and LLC expenses. You can loose your LLC legal protection(Corporate Veil) if you use your LLC account for your personal expenses.
Open a Business Credit Card
We recommend that you apply for a Business Credit card under the LLC name and start using this credit card instead of personal credit cards. Pay the LLC credit card bill from the LLC business account. This way your business and personal expenses are recorded separately for tax purposes.
Inform The Franchisor
If you own a Franchise such as Taco Bell or Subway, inform your franchisor regarding the entity change so they can have proper legal documents drafted. Furthermore provide them with new bank info so they can ACH royalties and any other fees from the new LLC Bank Account.
Update Info with Merchant Credit Card Processor.
Provide new EIN number(W9 form) & Update Bank Account info with your Merchant Credit Card Processor. This way they issue correct 1099K to your LLC EIN number and not your personal social security number.
Update Sellers Permit
If you collect and pay sales tax, update your Sellers Permit with the State. Many state also have state level permits such as Tobacco license and Liquors license. Make sure you call state and update all the licenses to reflect the LLC info.
Inform Payroll Company
If you already have employees, you need to change Payroll under new EIN number and State Employment Tax ID(EDD in CA). Provide your payroll company new LLC info as well as your new bank account so all the appropriate payroll taxes can be timely paid from your new LLC bank account.
Its important that payroll company issues 941, 940 and W2 with correct EIN number for the LLC.
Update your City and County Licenses
Inform your city and country regarding your change in entity and update your legal information with them. For example, you city may want to update your city license under the LLC name and your country may update your health permit under LLC.
Incase you forget to inform any government agency regarding your new LLC, update the info when they send you renewal letter at the end of the year.
Inform your Business Insurance
As soon as you are ready to operate under LLC name, transfer your business insurance and workers compensation under the new LLC. In case of a lawsuit your insurance will only protect you if they have correct information. We recommend talking to your insurance agent so they can walk you through this process step by step.
Transfer Lease Under The LLC
If you signed a lease under your personal name or under your sole proprietorship, we recommend talking to your Landlord & your business attorney and Transfer the Lease agreement into LLC’s name
Inform Vendors & Suppliers
Its important that you update your banking info and billing info with your vendors such as suppliers & utility companies. Provide them the name of the LLC so they can start billing under the LLC name instead of your personal name.
If you changed your liquor license or seller permit, provide updated copy to the vendors. They are required keep updated copy of sellers permit or any licenses.
It is a lot of work to transfer your business from Sole proprietorship to an LLC but it is definitely worth it. LLC can help provide Limited Liability protection, Tax Savings(by making S Corp Election) and less change of an audit by separating your business from sole proprietorship to an LLC name.
As always we highly recommend working with your accountant and business attorney to make sure you follow all applicable laws in order to avoid any financial hurdles during this process.