How to Change a Sole Proprietorship to an LLC

Are you thinking about changing your sole proprietorship to a limited liability company (LLC)? If so, you’re in good company. The LLC is one of the most popular formation types for small business owners. This structure offers a range of potential benefits, from its flexible management options to the ability to separate personal assets and liabilities from those of your business.

While the prospect of officially forming an LLC may seem daunting, we’re here to help. Keep reading to discover step-by-step directions for converting your sole proprietorship to an LLC. We’ll also explore how our products and services can help cut through the red tape and handle the process for you. Because with us, you never have to go it alone.

Sole Proprietorships vs. LLCs

Before we dive into the steps, let’s take a quick look at why a sole proprietor might opt to form an LLC.

Why would I change my sole prop to an LLC? 

A sole proprietorship is an unincorporated business with only one owner. This type of business is also sometimes referred to as a “sole trader” or a “proprietorship.”

Forming a sole proprietorship doesn’t require filing any official documents with the state. Generally speaking, if you’re selling something or providing a professional service, you’re probably already considered a sole proprietor. Learn more about the definition of a sole proprietorship.

A limited liability company (LLC) is a business structure in which the business is a separate legal entity from its owners (which are called “members”). This formation type involves filing formation documents with the Secretary of State.  Learn more about the definition of an LLC

As their businesses grow, many sole proprietors opt to officially form their business as an LLC. The benefits of changing from a sole proprietorship to an LLC include:

• Personal liability protection
  • One of the biggest advantages of the LLC structure is that it separates your personal assets and liabilities from those of your business. That means, if someone sues an LLC, they usually can’t also go after the members’ personal savings and belongings.
• Legitimacy
  • Having an “LLC” designator gives your business more legitimacy in the eyes of customers, banks, and other prospects.
• Tax options
  • By default, an LLC is either taxed as a sole proprietorship (for single-member LLCs) or a general partnership (for multi-member LLCs). However, LLC owners can also choose to be taxed as C corporations or S corporations, depending on what circumstances are most favorable for their business.
• Multiple owners
  • By definition, a sole proprietorship can only have one owner. On the other hand, LLCs can have multiple owners, or members.

Learn more about all the differences between sole props and limited liability companies.

Steps to Change a Sole Proprietorship to an LLC

Changing your sole prop to an LLC involves officially registering your business as a limited liability company with the state. This means giving your business a name, filing formation documents with the Secretary of State, appointing a registered agent, drafting an operating agreement, and obtaining an EIN. 

Below, we’ll cover each step in detail. 

Step 1. Name your LLC

The first step to forming an LLC is to name your business. As a sole prop, your business name was probably the same as your personal name. But with an LLC, you’ll want an official company name that conveys legitimacy and captures your desired branding tone. Be sure to choose a name that you’ll want to stick with long-term. It’s also a good idea to choose a name that makes it clear what types of products and/or services you offer. 

Most importantly, you’ll need to adhere to the guidelines of the state in which you’re registering your business. While each state has slight variances in its rules, they all require limited liability companies to include some sort of LLC designator at the end of the company name. A few common LLC designators are: 

• LLC
• L.L.C.
• L.C.
• Ltd.
• Limited
• Limited Liability Company

Again, different states have different rules surrounding which LLC designators are required/allowed. Be sure to check with the Secretary of State in your state for specific guidelines. 

Most states also prohibit the use of words that suggest your LLC is a legal, banking, or government entity. Profanity and vulgar language are also typically disallowed. 

Your LLCs name must be distinguishable from any other business names in the state. Use our state-specific business entity search page to determine if your desired name is available. For example, you can check here to search for business entities in California. 

If your sole proprietorship has a “doing business as” (DBA) name (also known as a trade name, assumed name, or fictitious name depending on your state), you may not be able to continue using it when you form your LLC. DBA laws vary widely by state. If your state allows DBAs and LLCs to share the same name and your DBA is the same as an existing LLC’s name, you’ll need to find a new name for your LLC before you file your paperwork with the state. No state allows two LLCs to share the same name.

Step 2. Appoint a registered agent

All LLCs are required to appoint a registered agent. A registered agent is an individual or business entity who receives legal notices on behalf of your business. In some states, this is also called an “agent for service of process,” “statutory agent,” or “resident agent.” 

Again, rules vary by state, but the general requirements for serving as an agent for service of process include: 

• Having a physical mailing address in the state where the LLC is registered (a P.O. box will not suffice)
• Being available during regular office hours to accept legal notices (service of process)

While you can legally serve as your business’s registered agent yourself in most states, this is not advisable. Just a few of the potential pitfalls of doing so include: 

• Potential embarrassment of being served with legal notices (such as notification that your business is being sued) in front of customers, colleagues, or others
• The inconvenience of having to be available during all normal business hours to receive notices
• Having to remember to update your RA’s office address with the Secretary of State when your business moves

These reasons are why many LLC owners choose to go with a professional registered agent service like ours. With our professional services, you can: 

• Not have to deal with the hassle of acting as your own agent
• Have peace of mind that your agent’s office address will remain up-to-date, and notices will be received and passed along in a timely manner
• Avoid the embarrassment of being served in front of others

Step 3. File the Certificate of Formation / Articles of Organization

To officially register your company as an LLC, you’ll need to file Articles of Organization with the Secretary of State. This document sets your company up as an LLC in the state where you’re registering your business. 

Depending on the state, a few other names for Articles of Organization include “Certificate of Organization” and “Certificate of Formation.” 

While this form can differ from state-to-state, some of the information you will typically provide on your formation documents includes: 

• Your LLC’s name
• Your registered agent’s name and address
• Your business’s mailing address
• The management structure for your LLC (member-managed or manager-managed)
  • Note: Member-managed means your LLC will be managed by its member(s). Manager-manager means you will either elect one or more specific members (if your LLC is a multi-member LLC), or hire an outside manager to handle day-to-day operations for your LLC. 
• The LLC organizer’s signature

In most states, you can file your Articles of Organization online, in person, by mail, or via fax. When filing your formation documents, you will also include your state filing fee and any additional fees (such as expedited filing fees). Learn more about LLC filing fees by state. 

View our step-by-step guide on How to file your Articles of Organization

Step 4. Create an operating agreement

To lay out how your LLC will be managed and run, you’ll need to create an operating agreement. While most states do not require this document by law, it is an important step in organizing your LLC. This is especially true when you’re going from a sole proprietorship to an LLC, as one of the main reasons you’re making this change is probably to add more structure to your business. 

An LLC operating agreement includes all of the pertinent details about how your LLC will be run, such as: 

• Allocation of member responsibilities, profits, and privileges (if multi-member)
• Protocols for adding new members
• Management structure (member-managed or manager-managed)
• Procedure for dissolving or winding up
• Succession plans should the member(s) pass away, retire, or leave the business
• Any other information about your LLC’s policies, rules, procedures, and business activities

Even if you’re a single-member LLC, an operating agreement is an important legal document for you to create. For example, many banks won’t let you get a business bank account without one. And, if someone sued your LLC, an operating agreement helps further demonstrate to the court that your LLC is a separate entity from you. 

Need some help? Use our interactive operating agreement template to make sure you don’t leave out a single detail. 

Step 5. Obtain an EIN

Register your LLC with the federal government by getting an Employer Identification Number (EIN). Much like a Social Security Number (SSN) does for individuals and sole proprietors, your new Employer Identification Number identifies your LLC to the Internal Revenue Service (IRS). 

An EIN is also sometimes referred to as a Federal Employer Identification Number (FEIN). This is the number you’ll use to file tax returns, open a business bank account, and conduct other activity for your business. 

As with every other step in this process, we can also help you obtain your EIN with our EIN service. 

Note: Once you obtain an EIN, you can open a new business bank account. Your new bank account is crucial to separate your personal assets and expenses from your business expenses. You may also want to get a business credit card to keep personal finances and debts separate from those of your business. 

Consider using a professional formation service

As you’ve read, there are several steps that you need to follow when changing your sole proprietorship to an LLC. If you want to make everything easier on yourself, you can use professional services like ours to handle the heavy lifting. 

From filing your formation documents, to offering an operating agreement template, to helping you keep your business compliant, we’re here to assist you throughout the entire process.