- What do you do when you've gotten to the point,
when you're ready, you've decided?
Enough with this sole proprietorship thing.
I'm ready to make it official.
Don't go anywhere.
'Cause I'm gonna tell you step by step
how to transition or convert or change
or go from sole proprietorship to an LLC.
(upbeat music)
Hi, there I'm Aiden Durham,
Business and Branding Attorney with 180 Law Co. in Colorado.
And I have helped hundreds
of clients set up successful businesses.
I've made a lot of content about a LLCs.
Far and away, LLCs are the most popular business entity
for small businesses to use
but not every business starts as an LLC.
A lot of us start as sole proprietorships.
When we're first starting a business
an LLC isn't always necessary.
And it's not always a good use
of often limited resources
when we're first starting a business, but eventually,
maybe things start to get a bit settled.
You're starting to make money.
Things are starting to go really well.
And it's time you took the leap
and made things more official
and start operating your business as an LLC.
Before we talk about how you go about doing that,
make sure you've subscribed if you haven't already done so
and be sure to hit that little notification bell,
so you don't miss any future episodes
of developing a business.
Going from a sole proprietorship to an LLC
isn't really all that different
from just starting a business as an LLC from the beginning.
There are some things that are different, but overall,
a lot of the process is exactly the same.
So if you wanna make sure you've covered all of the bases
not just with forming the LLC,
then check out my ultimate new business checklist.
You can download that for free
through the link in the description.
Before we talk about how might convert to an LLC,
let's talk first about why you would want to do that.
The primary reason, the primary driving force
for most people when forming an LLC
is for the liability protection that you get from it.
By forming an LLC,
you are separating yourself personally from your business
including its liabilities, debts and obligations.
So that's really the primary benefit
and why you would typically wanna form an LLC
is for personal liability protection.
There's also a potential for some tax savings
sometimes if you make an S-Corp election for your LLC.
Now, just forming an LLC.
If you're going from sole proprietorship to LLC,
you're really not gonna see any difference at all
in your taxes, the tax portion
how its tax is exactly the same,
but you can potentially see some savings
by making an S-Corp election for your LLC.
And then of course, some people feel like being
an LLC operating your business as an LLC,
just makes you look more legit, more professional,
more official if you have that LLC in your business name.
Whatever the reason behind it before we start this process
of going from sole proprietorship to LLC,
we wanna have kind of a good date in mind
of this is when it's going to be official.
This is when we will be officially no longer
a sole proprietorship, that doesn't necessarily mean
this is the day we're gonna file our LLC paperwork.
'Cause sometimes we have to do that in advance
but we need to set a date
for this is when officially we're gonna be
have everything moved over
have everything switched and officially we're now working
as an LLC, this whole process, everything involved
usually will take a month or two.
So I like to set that date out at least a month,
give yourself at least a month to prepare and plan
for this transition.
So now, how do we go about doing this thing?
The first step of course is to form the LLC.
This is done by filing a form with the secretary
of state in state where you want the LLC to be registered.
In a lot of states,
this is called the articles of organization.
Not every state calls it that,
sometimes it's a Certificate of Organization,
Certificate of Formation.
The name of the form is gonna vary from state to state.
A lot of it are called articles of organization.
So you would file the articles of organization
to get the LLC formed.
If you're trying to decide
which state should I form this in,
99 out of a hundred times, I recommend to my clients,
let's just form this thing in the state that you live in.
A lot of people think, oh
I wanna form in Wyoming or Delaware or Nevada.
I get these tax breaks,
no income tax or no corporate tax, blah, blah, blah.
If you are a single member, LLC, which you would be
if you're going from sole proprietorship to LLC
and you're not adding any other members,
you'd be considered a single member LLC.
If you form in Delaware, but you live in Colorado
you're not paying income tax in Delaware.
Anyway, you're still paying income tax in Colorado
'cause that's where you live.
So for single member LLCs,
there's very rarely a good reason to form in a state
other than the state where you live, of course,
talk to an attorney,
make sure that's the right move for you.
But if you're unsure,
usually you wanna start in the state where you live.
So of course, before you file the articles
of organization actually form the LLC
you need to know which state you're gonna register it in.
You're also gonna need to know the name
that you want to use for the LLC.
And you'll wanna check the secretary estate's records
to make sure that name is available.
You'll also need the address that you're gonna use
for the LLCs principal office address and you'll need a name
and address for the LLC's registered agent.
Some states might request more information than just that
but at least at the basics,
most states are gonna require those four things.
You might also need to know how the LLCs
is going to be managed.
If it's gonna be member managed versus manager managed.
You can check the description,
I will link to some resources
as far as virtual office addresses go.
If you don't wanna use your home address,
registered agent services
if you don't wanna use your home address
or be your own agent, I'll link to some resources
in the description to help you guys with that.
You also may need to withdraw a DBA
or trade name registration before you file the LLC.
Maybe if you've been operating under a DBA or a trade name
for your sole proprietorship and the name that you wanna use
for the LLC is that same DBA or trade name,
then you might need to withdraw that DBA registration.
So the name becomes available
before you file the paperwork for the LLC.
So, there won't be a conflict with the naming.
Maybe if that applies to you, if not,
then you don't have to worry about it.
After you form the LLC of course,
you might also want to then file
or register a DBA or a trade name.
If you're gonna be operating
under a name that is different from the LLC's name.
All right, so there we go.
The LLC is formed.
We did it, we formed the LLC.
Is that it?
No, it's definitely not it.
There's more to it.
Next, we need to pair our operating agreement for the LLC.
This isn't something that's required in most states,
it's optional but we know from case history
and legal precedent that it's a really good idea,
particularly for a single member LLC,
to have an operating agreement.
There are lots of templates
and free resources available online.
There are other templates and guides that you can purchase.
Of course, I recommend working with an attorney
to have your operating agreement drawn up if you can,
one way or another though
you wanna make sure you have an operating agreement
for the LLC.
Next we're going to apply for an EIN
for the LLC or a tax ID number.
This is like the social security number for the LLC.
If you already had an EIN for your sole proprietorship,
then you'll need to apply and get a new EIN for this LLC.
That's a big question that often comes up
is do I need a new EIN
if I'm going from sole proprietor to LLC?
Yes, you do.
If you didn't have an EIN for your sole proprietorship,
then it's not required that you have one for an LLC.
A single member LLC isn't required to have an EIN by the IRS
but for banking purposes and kind of just good practice
it's essentially required.
So whether or not it's actually legally required
it's still a good idea once you've set up that LLC,
to go apply for an EIN
or a new EIN if you already had one.
Next, you're gonna wanna open a new business bank account
for the LLC.
Maybe you had a dedicated bank account
for your sole proprietorship, that's great.
We don't wanna use that one anymore.
We've got this LLC now
and it needs its own bank account attached to its EIN
and its name and all of that.
So, we're gonna get rid of that old one
or maybe you didn't have an old bank account
for the sole proprietorship, either way,
we're gonna set up a new business bank account for the LLC
and we're gonna get all
of our bookkeeping and records set up.
So, whether you're doing this yourself
like through QuickBooks or another bookkeeping software,
get all that set up under the name of the LLC.
And speaking of bookkeeping
now, I promise you guys, now's the time.
Not later, don't try to do it yourself.
Now's the time to make sure you're setting
up your bookkeeping and accounting records
and ideally hiring someone to handle those things for you.
Whether it's an in house bookkeeper,
a part-time book keeper, tax professional accountant, a CPA.
You want someone ideally, unless you are really good
at this stuff and you're okay handling it yourself.
It's good to have
a tax professional accounting professional,
helping you with your accounting and your bookkeeping.
I recently connected with a company called Finance Pal
and I'm really excited about it.
Finance Pal offers a variety
of services from bookkeeping, payroll,
accounting services, tax advising services, tax filings
and more all for one flat affordable monthly rate.
And Finance Pal works exclusively
with small businesses so they can custom tailor
a quote that'll fit your specific needs.
So if you're now making the leap
and becoming official as an LLC,
it's also a great time to make the leap and become official
by outsourcing your bookkeeping and accounting.
And if you want a way to do it in an affordable
and efficient way, then Finance Pal is perfect option.
I will, of course put a link
in the description so you guys can check them out.
But I do have a little secret for you.
So of course, you can use my link
in the description to request a quote from Finance Pal.
But then if you tell 'em I sent you and ask for 50% off
of the first month's fee, they'll probably give it to you.
All right, so now we've got everything set up for the LLC.
The LLC is set up of course,
we got our operating agreement prepared
got our tax ID number.
And we set up our bank accounts and our bookkeeping records.
All of that stuff is really the same as it would be
if we were starting an LLC fresh from the very beginning,
but we're not, we are going from sole proprietorship to LLC.
So, here are the special things that are going to apply
because we've already been operating
as a sole proprietorship.
Now we need to transfer, move, retitle, whatever it is,
we need to get anything that belonged
to the sole proprietorship,
we need that moved over to the LLC now.
So money in bank accounts, of course,
if you had your funds from your sole proprietorship
in a bank account, put that over into the LLC's account,
computer equipment, office supplies, inventory
even intellectual property, trademark, copyright
patent registrations, any assets of the sole proprietorship,
we want to make those assets of the LLC now.
Exactly how we go about doing that transferring,
or assigning or moving assets to the LLC,
it's going to depend on the asset itself.
Typically we're gonna want some kind of document showing
that we have transferred this
from the sole proprietorship to the LLC.
It might be a bill of sale or a transfer
or assignment agreement,
essentially as if you are selling these assets to the LLC
because you kind of are not for cash necessarily,
but you're selling them.
You're giving them over to the LLC
in exchange for this membership interest in the LLC.
So for all intents and purposes
we kind of are selling them to the LLC.
So we need to treat it like
as if we were selling them to anybody else.
So again, bill of sale, transfer assignment agreements
with intellectual property, registrations
trademark registrations, we would need to file
an assignment document with the US PTO to effect that.
We also need to change the name on any of these accounts.
Things like insurance policies, vendor accounts
maybe signed up for, I don't know
a Stripe or a Square account with your sole proprietorship.x
We need to get all of these now under the LLC
it's gonna depend on each vendor, the other party.
Sometimes you might need to start a brand new account
under the LLC.
Sometimes, you'll be able to update the EIN and the name
to the LLC, whatever the case,
we wanna get everything under the LLC,
same goes for things like business licenses,
business permits, sales tax licenses, or permits
anything that had the sole proprietorship attached to it
or the sole proprietorship's name or anything that you use
for the sole proprietorship, one way or the other,
we wanna get the LLC named on that thing instead.
We also need to deal with any contracts
that might have been under the sole proprietorship,
because we now want these contracts under the LLC.
So this might be things like service agreements,
client contracts, between you and your clients
contracts with your service providers or vendors.
How we go about doing this is going to depend
on the terms of the contract itself.
Sometimes we can just amend the contract
to change the name to the LLC.
Sometimes we have to sign a whole new contract.
So terminate that initial contract
and sign a brand new one under the name of the LLC.
And sometimes again, it always depends
but sometimes we have to let that existing contract expire
and then we can enter into a new one under the LLC.
So again, it always, of course depends
but one way or another, we wanna make sure any contract
that sole proprietor ship was a party to,
we now want the LLC to be a party of that contract instead.
And then finally, of course, we wanna just update
the name of the business anywhere and everywhere.
Even if the name of your LLC is substantially the same
as the name that you used for your sole proprietorship
that LLC name is still going to include something like LLC
or limited or some designation.
And we need to put that on marketing,
advertising, materials, contracts.
People who are dealing with the LLC need
to know they are dealing with an LLC.
And that's why we have that LLC in our business name.
So, we wanna make sure Google listing, Space Book pages,
Instagram, anywhere your business existed.
Now it's the LLC that exists.
Bottom line, we need to make sure anything
and everything everywhere that belongs
to these sole proprietorship now has been transferred
or assigned or moved over and now belongs to the LLC.
If you don't take the proper steps in doing that,
if they're still of still using personal assets for the LLC
that haven't really been transferred over,
you could be on the hook personally
for debts, liabilities, obligations of the business.
And there you go folks, we've got our bases covered
as far as moving from that sole proprietorship to the LLC.
Of course, there are a lot of other things
that go into starting a business
even if you're starting an LLC that you originally started
as a sole proprietorship.
So again, check the description for a link
to download my free ultimate new business checklist.
If you got value outta this video,
gimme a thumbs up and be sure to subscribe
and click that little notification bell
so you don't miss any future episodes.
Thank you so much for watching,
I'm Aiden Durham and I'll see you next time.
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