How to convert a sole proprietorship to an LLC
You have a business operated as a sole proprietorship and you want to now set up an LLC to run your business. Here’s how you do it!
You and Small Biz Are One
Keep in mind this fact: your business and you are the same, because you personally own the assets that comprise your business. You may have an EIN for the business operations, but you were the applicant of your EIN. In other words, the EIN is yours to operate the business, but there is no separation between you and your business.
LLC is a New Legal Person
When you form an LLC, you are forming a new legal person, which is separate from you. This legal person or entity will have many of the same rights as you and I have as citizens of the US: it can own real estate; it can own checking accounts; and it can own and operate businesses.
EIN – The SSN of your LLC
Because the LLC is a separate legal person, it will need its own tax identification number, just like you have a Social Security Number (SSN) which is different from each individual, an LLC will need to get its own EIN.
Time to Separate
Once your LLC is set up, it will need to set up its own bank account and then you will need to transfer the ownership in your business to the LLC. In return, the LLC will give you ownership in the LLC.
My Brother is Not Me
Still not sure how this works? Think of it this way, when you create a new LLC, it’s like having a brother. You and your brother are close but you are two different people. If you sell your brother your business and he now owns and runs the business and the business assets, if someone gets injured from the business, who are they going to sue; you or your brother? Obviously, your brother!
This is same concept when it comes to an LLC. Because the LLC is a separate person and the LLC will be the owner and operator of the business, you will no longer own the business, the LLC will. Consequently, if the business causes injury, the owner of the business is the one who is liable and that would be the LLC.
Even if you take action and set up an LLC and transfer your business to an LLC, you may still be personally liable for the LLC’s actions. Be sure you take the proper steps to make your LLC “bullet proof” to lawsuits, and keep your LLC compliant with its state’s rules.
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