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Converting a sole proprietorship into an LLC

On Behalf of | Jul 1, 2024 | Business Law

Establishing a sole proprietorship is one of the simplest ways to start a new business. There is minimal paperwork involved and no need to locate business partners or board members to help run the organization.

However, sole proprietorships may not be the best option for those worried about liability or in need of certain tax benefits. For many professionals running a small business, a sole proprietorship can be adequate initially. Still, they may eventually realize that they need more protection or a more structured form for their business.

A limited liability company (LLC) is an excellent option for those who have started a successful sole proprietorship. What does converting a sole proprietorship to an LLC typically entail?

Owners must file paperwork with the government

To officially form an LLC from a company previously operated as a sole proprietorship, it is typically necessary to submit paperwork to the state. In some cases, those converting a sole proprietorship to an LLC may take on partners to help run the company. Otherwise, they may operate the company as a sole member LLC.

Notifying the government of the change in business structure is crucial. In some cases, it may be necessary to change the company name based on other LLCs currently operating in the state. The business owner has to submit articles of organization documents to the Florida Division of Corporations.

They may also need to file updated documents with tax authorities, including the Internal Revenue Service (IRS) to update the Employer Identification Number (EIN) for the business. Typically, the process also involves the creation of an LLC operating agreement, especially if the owner works with other members. The company may need to reapply for permits and licenses as well.

Owners need to communicate with outside parties

When converting a business from one form and name to another, proactive communication with outside parties is of the utmost importance. From utilities companies and financial institutions to employees and clients, many parties require notice of the change in business structure, especially if it comes with a change in business name.

Making the effort to convert a business from one structure to another can lead to a variety of legal benefits for the owner of an organization. Those who have proper support are less likely to make mistakes that could compromise the success of their conversion attempts.