Transitioning from a sole proprietorship

     Transitioning from a sole proprietorship to another formal business entity is a common step for entrepreneurs who want liability protection, tax flexibility, or credibility with customers and investors. The process begins with choosing the type of entity that best fits the business’s needs. Most often, a Limited Liability Company, since it separates personal and business liability while remaining relatively simple to manage, though it may not be the most optimal choice.

Once the new structure is chosen, the entrepreneur must then select a unique business name that complies with state requirements and confirm it is available for registration. Next, they file formation documents called Articles of Organization for an LLC or Articles of Incorporation for a corporation with the Secretary of State or relevant state agency, along with paying the required filing fees.

After the new entity is officially recognized, the entrepreneur should obtain an Employer Identification Number (EIN) from the IRS, since the business is now considered a separate legal entity. The owner will also need to update practical business matters, including opening a new bank account under the new entity’s name, transferring existing contracts and leases, and notifying vendors, clients, and licensing agencies of the change. Any business assets, such as equipment, vehicles, intellectual property, or real estate, should also be formally transferred from the individual’s name into the new entity’s ownership to ensure the liability shield is effective.

It is also recommended that new LLCs’ owners create an operating agreement, even if not required by the state, to establish management rules, profit distribution, and ownership rights. Corporations, by contrast, would adopt bylaws and issue shares. Depending on the industry, business licenses and permits may need to be amended or reissued to reflect the new entity.

Considering whether it’s time to transition your business to a formal entity? The Center for Financial, Legal, and Tax Planning, P.C., can guide you through the process. Call us at (618) 997-3436.