Sole Proprietorship to LLC: How to Make the Switch

You cannot convert a sole proprietorship into an LLC with a form, because a sole proprietorship is not an entity: it is you, doing business. To switch, you form a new LLC with your state, then move the business into it: the EIN, licenses, bank account, contracts, insurance and trade name. The state's filing fee is $35 to $520; the rest is a checklist.

The order below is the one that avoids the usual problems: a bank that will not open an account before the state has approved the LLC, a client paying the old name after the switch, a license that quietly stayed in your personal name. Most of it can be done in the weeks after the state approves the filing.

What changes when you switch, and what does not

What changes is who the business is. Before, every contract, account and debt was yours personally. After, the LLC is a separate legal person that owns the business, and you own the LLC. New contracts are signed by the company, new debts are the company's, and claims against the business generally stop at the company's assets. That is the point of switching, and it only works if the business really moves: an LLC that exists on paper while you keep invoicing and banking in your own name protects very little.

What usually does not change is your federal income tax. A single-member LLC is, by default, disregarded for federal income tax, so its profit lands on Schedule C of your personal return just as a sole proprietor's does. The switch also does not move old obligations: debts and contracts you took on personally before the LLC existed stay yours unless the other party agrees to transfer them to the company.

The switch checklist, step by step

1. Form the LLC. Form it in the state where you live and work; forming in another state usually means registering in yours as well. Check that the name is available and follows the state's rules (see LLC name rules), name a registered agent with a street address in the state, and file the formation document with the state's fee. Then wait for the state's published processing time (each state's is in how long it takes to form an LLC). Sign an operating agreement as soon as the LLC exists, even as its only member: banks often ask for it, and it is evidence that the company is separate from you.
2. Sort out the EIN. Whether the LLC needs a new EIN depends on its shape. The IRS's own list ("Do you need a new EIN?") says a single-member LLC can use your sole proprietor EIN if it does not choose to be taxed as a corporation or an S corporation and does not have employees or owe excise tax; one that has to file employment or excise taxes needs its own. A sole proprietor who forms a partnership, which a multi-member LLC is by default, needs a new one. Many owners get the LLC its own EIN anyway, because banks and payment platforms want the number to match the LLC's name; the decision is walked through at llc-ein.com.
3. Move licenses and permits. List every license, permit and registration the business holds: the city or county business license, any state professional or trade license, the sales tax permit, state payroll and unemployment accounts, and industry registrations. Then ask each issuing agency what the switch requires. Some update the holder's name; many treat the LLC as a new business and issue a new license or account, sometimes with a fee. Keep the old ones active until the new ones are in place so there is no gap.
4. Open the LLC's bank account. Banks typically ask for the approved formation document, the LLC's EIN and the operating agreement. Once the account is open, point payment processors, marketplaces and automatic payments at it, and let the old account run down after the last checks clear. From here on, business money goes in and out of the LLC's account only; paying personal bills from it, or the reverse, is the habit that most weakens the liability protection.
5. Update contracts and invoices. Ongoing contracts, leases and service agreements are in your personal name. Many can be assigned to the LLC with the other party's consent; some need to be signed again. New contracts are signed by you as a member or manager of the LLC, in the company's exact legal name. Clients who pay you need a new W-9 with the LLC's name and taxpayer number, and invoices, estimates, the website, email signatures and business cards all change to the LLC's name.
6. Update insurance. Policies written to you as a sole proprietor may not cover the LLC. Ask your agent to make the LLC the named insured on general liability, professional liability, commercial auto and, if you have employees, workers' compensation. Insurance and the LLC do different jobs: the policy pays covered claims, and the LLC keeps the uncovered ones away from your personal assets.
7. Clean up the DBA. If you traded under a name other than your own, you probably registered it as a DBA (also called an assumed, fictitious or trade name). That registration generally belongs to whoever filed it, so it does not carry over to the LLC. If the LLC's legal name now covers it (Lakeside Design LLC replacing Lakeside Design), withdraw or let lapse the old filing where the state or county allows it. If you will keep trading under a name that differs from the LLC's legal name, the LLC registers its own DBA. How that works is in DBA vs LLC.
8. Put the LLC's deadlines on the calendar. The LLC brings obligations a sole proprietor never had: a recurring state report in most states, a registered agent to keep current, and in some states an LLC tax or fee from the first year. The table below shows the first filing each of the ten largest states expects; the full list of post-formation tasks is in what to do after forming your LLC.

What the switch costs in the ten largest states

The state's fees are the only fixed cost of switching. Across all 50 states and DC the formation fee runs from $35 in Montana to $520 in Massachusetts, median $100. Here is what the ten most populous states charge, the first filing each expects after the LLC is formed, and the recurring fee that follows.

Taxes in the year you switch

For a single-member LLC on default taxation, the business income still goes on your personal return, before and after the switch, so forming the LLC does not by itself create a new federal return. A multi-member LLC is different: it files a partnership return from the date it starts, and each member reports a share. Either way, the LLC keeps the option to elect S corporation treatment once profit justifies it (see LLC vs S corp). States can differ, and some begin an LLC tax or fee in the first year, so a CPA can confirm how to report the year of the change.

Mistakes to avoid

• Signing new contracts in your own name after the LLC exists.
• Keeping business income flowing into the old personal or sole proprietor account.
• Assuming licenses and permits followed the business into the LLC without asking the agency.
• Leaving clients with the old W-9, so payments and year-end forms go to the wrong name and number.
• Letting the insurance stay in your personal name.
• Forgetting the LLC's first state report, which arrives on a schedule the sole proprietorship never had.

Still deciding whether to switch at all? The trade-offs, with each state's cost, are in LLC vs sole proprietorship.