Converting Sole Proprietor to LLC
If you have started a sole proprietorship business but now want to expand your business or want liability protection, or need tax incentives, what should you do? One of the best solutions is to convert from sole proprietorship to a Limited Liability Company. Once you convert your existing business, you will be required to apply for and obtain an EIN for LLCs. Let’s look at an example to understand the conversion and getting of a new EIN.
How did John convert his sole proprietorship to LLC and get a new EIN?
John Doe is a freelance graphic designer and he started his business as a sole proprietor. A few months down the line, he started getting multiple designing projects from overseas and the workload became much higher than he anticipated. So, he decided to hire some employees so that the workload could be divided and he would be able to achieve his business goals. In order to hire and keep employees as well as tackle the rising requirements of the business, he requires a better office infrastructure. A bigger office infrastructure meant investment and hence he took a loan to expand his business.
This restructuring brought John to the point of thinking of converting his Sole Proprietorship to an LLC, which would help protect his personal assets as well. Moreover, if he doesn’t convert his Sole Proprietorship he will be responsible for filing taxes and proper administration for these hires.
So, he converted his sole proprietorship to an LLC by following steps on how he could obtain a new EIN for LLC.
He converted his sole proprietorship to an LLC and obtained a new EIN for an LLC through the following steps:
- Step#1 – Register LLC: The first step was to register a Limited Liability Company according to the State Statutes. John filed the Articles of Organization with the state where he wanted to form his LLC along with registration of LLC name as this will also help him to apply for and obtain an EIN for LLC.
- Step#2 – Dissolution: John has to dissolve the existing business, which in this case is the DBA or sole proprietorship. It has to be dissolved in the state, city or county where it was originally registered.
- Step#3 – LLC Operating Agreement: John may be required to create an operating agreement although not every state requires it. An operating agreement is a mandatory requirement in five states, which are Delaware, California, Missouri, Maine and New York
- Step#4 – Obtain a new EIN: An Employer Identification Number (EIN) is required if you are converting or changing your business structure as outlined by the Internal Revenue Service (IRS). Since John wants to convert existing Sole Proprietorship with or without a DBA into a Limited Liability Company; he will be required to submit the EIN for LLC application with the IRS. John will receive a new Employer Identification Number (EIN) by visiting the IRS’ website.
- Step#5 – Business License and Permits: The type of business license or permit required varies from one state to another. It is also different from one city or county to another depending on the state. Some businesses may require a single license while others may need multiple licenses or permits.
These five steps are very important towards converting your sole proprietorship to a Limited Liability Company and for obtaining a new EIN for LLC. Apart from this, there will be a lot of paperwork involved right from changing registered LLC names in bank accounts, accounts payable, vendor accounts, mailing addresses, websites, business cards, online listings etc.