How to Change Sole Proprietorship to LLC: A Complete Step-by-Step Guide

 

How to Change Sole Proprietorship to LLC: A Complete Step-by-Step Guide

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If you started your business as a sole proprietorship, you’re not alone—most small business owners do. But as your business grows, the risks increase, and many entrepreneurs decide it’s time to upgrade to an LLC (Limited Liability Company) for better protection, credibility, and tax flexibility.

The good news?
Converting a sole proprietorship to an LLC is simple when you follow the right steps.

This guide explains exactly how to change your sole proprietorship to an LLC, including state filing requirements, costs, tax implications, and what to do after forming your new LLC.

Why Change From a Sole Proprietorship to an LLC?

A sole proprietorship is easy to start—but it offers no liability protection. That means your personal assets (home, savings, car) are at risk if your business is sued or goes into debt.

An LLC solves that problem and more.

Benefits of switching to an LLC:

✔ Personal liability protection
✔ Business credibility and professionalism
✔ Access to better contracts, vendors, and banks
✔ Opportunity for tax savings (especially with S-Corp election)
✔ Separate business identity
✔ Easier to scale or add partners

If your business is making money or taking on risk, converting to an LLC is a smart move.

How to Change Sole Proprietorship to LLC (Step-by-Step)

Although you’re not technically “converting” the business in most states, the process is simply:
Create an LLC → Transfer business assets → Update accounts → Close/transition sole proprietorship licenses.

Here’s how to do it correctly.

1. Choose Your State and LLC Name

Most business owners form their LLC in their home state, where they operate and earn income.

Select an LLC Name:

  • Must be unique (check your state’s business database)

  • Must include “LLC,” “L.L.C.,” “Limited Liability Company,” or similar

  • Cannot include restricted words like “bank” or “insurance” unless approved

If your sole proprietorship used a DBA name, you can:

✔ Use that name for your LLC
or
✔ Keep your sole proprietorship DBA and file a new DBA under the LLC

2. File Articles of Organization With Your State

To officially create your LLC, file Articles of Organization (sometimes called a Certificate of Formation).

This document lists:

  • LLC name

  • Business address

  • Registered agent

  • Management structure

  • Purpose (usually general business)

Cost:

Varies by state: $40 to $500 (most common: $100–$150)

Once approved, your LLC becomes a legally recognized entity.

3. Create an LLC Operating Agreement

Even single-member LLCs need an Operating Agreement, which outlines:

  • Ownership

  • Management

  • Profit distribution

  • Liability protections

  • Procedures for adding partners

  • What happens if you leave the business

Banks often require this before you can open an LLC bank account.

4. Get a New EIN for Your LLC

Even if you already had an EIN for your sole proprietorship,
you must get a new EIN for the LLC—unless your LLC has no employees and you remain a disregarded entity (still recommended to get one).

Apply for FREE at the IRS website.

Your new LLC EIN will be used for:

✔ Bank accounts
✔ Payroll
✔ Tax filings
✔ Vendor accounts

5. Transfer Assets, Contracts, and Licenses to Your LLC

Your LLC is a new legal entity.
This means you must transfer your existing business assets from your sole proprietorship to the LLC.

Transfer:

  • Bank accounts

  • Website domains

  • Social media accounts

  • Contracts & agreements

  • Business equipment

  • Inventory

  • Vehicles (if registered to the business)

  • Intellectual property

Update:

  • Clients and vendors

  • Payment processors (PayPal, Stripe, Square)

  • Marketplace accounts (Amazon, Etsy, eBay)

  • Software subscriptions

  • Utility accounts

Reapply or Amend:

  • Business licenses

  • Professional permits

  • Reseller permits

  • State/local tax accounts

Some agencies allow amendments; others require a new registration under the LLC.

6. Open an LLC Bank Account

Do not continue using your sole proprietorship account.

You need a dedicated LLC business bank account to:

✔ Maintain liability protection
✔ Avoid mixing personal and business funds
✔ Establish clean financial records

Banks generally require:

7. Update Your DBA (If Applicable)

If your sole proprietorship used a DBA name, you’ll need to:

  • Cancel the old DBA
    and/or

  • File a new DBA under your LLC

Example:
Sole proprietorship “Sarah’s Web Design” → new LLC “Sarah Designs LLC”
You can file:
Sarah’s Web Design → DBA of Sarah Designs LLC

8. Close Out Your Sole Proprietorship Tax Accounts

Your sole proprietorship ends when your LLC begins.

You may need to:

  • Cancel your business license

  • File a final Schedule C at tax time

  • Close your state sales tax permit (if separate)

  • Close payroll accounts (if separate)

Once the LLC is active, all new income should go through the LLC.

9. Inform Your Clients, Vendors, and Partners

Send a notice that your business is now:

[Your LLC Name]
A new legal entity replacing your sole proprietorship.

Update:

✔ Contracts
✔ Invoices
✔ Proposal templates
✔ Insurance policies
✔ Lease agreements
✔ W-9 forms

This ensures you get paid under your new LLC—no delays.

Tax Implications: What Changes When You Switch to an LLC?

Default Tax Status

A single-member LLC = taxed like a sole proprietorship
A multi-member LLC = taxed like a partnership

Option: Elect S-Corporation Tax Status

Once your LLC earns ~$60–$80k in annual profit, an S-Corp election may save thousands per year by reducing self-employment tax.

Your new LLC will file:

  • Form 1040 + Schedule C (single-member)

  • or Form 1065 + K-1s (multi-member)

  • or Form 1120-S (if S-Corp elected)

Does Changing From Sole Proprietorship to LLC Affect Your Taxes This Year?

No major changes—unless:

  • You elect S-Corp

  • You hire employees

  • Your business structure changes

However, the IRS will require you to use your LLC EIN moving forward.

Common Mistakes to Avoid When Switching to an LLC

❌ Forgetting to open a new LLC bank account
❌ Continuing to accept payments under your sole proprietorship
❌ Not transferring contracts or licenses
❌ Not updating payment processors
❌ Mixing funds (piercing corporate veil risk)
❌ Failing to notify clients and vendors
❌ Not updating insurance coverage

A clean transition avoids compliance and liability problems.

How Long Does It Take to Switch From Sole Proprietorship to LLC?

Typically:

  • Filing approval: 1 day to 2 weeks

  • EIN: Immediately (online)

  • Bank account: Same day once documents are ready

  • Transferring assets/contracts: 1–30 days, depending on complexity

How Much Does It Cost to Convert a Sole Proprietorship to an LLC?

Typical costs:

  • State filing fee: $40–$500

  • Operating agreement: Free–$200

  • Registered agent (optional): $99–$300/year

  • DBA filings: $10–$100

  • Business license updates: Usually small fees

The process is usually affordable—and the liability protection is priceless.

Final Thoughts: How to Change From Sole Proprietorship to LLC

Here’s the full process in one list:

  1. Choose your LLC name

  2. File Articles of Organization

  3. Create an Operating Agreement

  4. Get a new EIN

  5. Transfer assets and contracts

  6. Open your LLC bank account

  7. Update licenses and tax accounts

  8. Close your sole proprietorship accounts

  9. Notify clients and vendors

Switching from sole proprietor to LLC provides legal protection, better tax options, and a stronger business foundation.

It’s one of the best moves you can make as your business grows.

Get Free Consultation with FormLLC

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