Grow Your Self-Care Business: How to Convert Your Sole Proprietorship to LLC

Transform your business in just a few months with these straightforward steps

Your self-care sole proprietorship is booming, and now you’re looking to bring on new employees and expand your business. Go you! 

But now, you’ve found yourself with a problem: How do you responsibly grow your enterprise without exposing yourself to additional legal risk and other liabilities?

The answer may be to transition away from your sole proprietorship and set up a limited liability company (LLC). Luckily, the process isn’t as complicated as you might think.

Here, we’ll lay out some of the important steps to convert sole proprietorship to LLC so you can make sure all of your bases are covered. We’ll also explain the liability and tax benefits of forming an LLC to help you determine if making the transition is the right call.

What is an LLC?

According to the U.S. Internal Revenue Service, a limited liability company (or LLC, for short) is a type of “business structure allowed by state statute.” 

While laws surrounding LLCs vary from state to state, LLCs usually offer a middle ground between sole proprietorships, partnerships, and corporations. They’re separate legal entities like corporations, so any legal or financial liabilities shift from the owner to the LLC. However,  LLCs are easier to set up and are far more flexible than corporations. 

LLCs can also be owned by a single person (a “single-member LLC”) or by multiple members (which can include a combination of people, corporations, or even other LLCs).

Why form an LLC?

As a sole proprietor, you effectively are your business. And if your self-care business has some serious growth potential, continuing as a sole proprietorship can be both a blessing and a curse. 

Sure, you have complete control over your business and its profits, but you’re also personally responsible for covering debts and legal liabilities. If someone decides to take legal action against your business, technically, they’re taking legal action against you — meaning your personal assets are at risk if anything bad happens.

An LLC shifts many of these responsibilities onto an external business entity separate from your personal affairs. If the business gets sued, generally the LLC is held liable, as opposed to the owners. If a company goes bankrupt, the LLC is affected, potentially keeping the members’ personal assets untouched. 

This liability covers employees, too. For example, if a stylist accidentally damages their client’s hair and that person decides to sue, the owner would be liable in a sole proprietorship. If that salon is instead registered as an LLC, that liability generally shifts away from the owner and onto the business. 

An LLC also makes paying taxes much less painful for your bottom line. LLCs are subject to “pass-through taxation,” which means that the tax liability is passed on from the business entity to each individual member. This protects the LLC from what is known as “double taxation,” where the business is required to pay both federal and personal taxes. However, the LLC can also opt to be taxed as a corporation and possibly enjoy lower tax rates — without the obligation to record minutes or hold shareholder meetings.

How to convert sole proprietorship to LLC

Forming an LLC is a bit more involved and time-consuming than starting up a sole proprietorship, but it’s not difficult, and the benefits of doing so are immense. So don’t fret — we’ll walk you through the basics of getting your new LLC off the ground. 

1) Check that your name is available to use

The first step is to ensure there aren’t any businesses in your state with the same name. It’s possible that the name you’re currently using as a sole proprietorship isn’t actually available for use as an LLC. Search your state’s business registry (usually available on the secretary of state’s web page) to see if your name is available. If it is, you’re good to go. If not, you may need to choose another name or consult a lawyer to see if you can use an alternate version of your current name.

2) Choose a registered agent to receive legal correspondence

A registered agent is responsible for receiving and managing any legal documents your LLC receives. Most states require assigning a registered agent to legally form an LLC, though in many cases, that person can also be one of the LLC’s members or employees as long as they live in the same state. Consult with your state’s laws and regulations for more specific requirements.

3) File your LLC formation documents with your state

Depending on your state, this document may go by something like “Articles of Organization” or “Articles of Formation.” Still, the purpose is the same: to provide basic information about your LLC to the state government. 

These documents will include the name and address of your LLC, the LLC’s purpose, and the name and address of your registered agent. It will also include the LLC’s management structure, whether that’s member-managed (the owner or owners oversee day-to-day operations) or manager-managed (a non-owner is hired to oversee day-to-day operations).

4) Write up an operating agreement

Some states also require filing an LLC operating agreement. Even if it doesn’t, creating one is good practice to ensure legal frameworks are in place for describing member responsibilities, as well as how the LLC will operate, disburse profits, manage losses, handle disputes, allow members to exit the business, and other crucial details.

5) Apply for an Employer Identification Number

The IRS requires LLCs to obtain an Employer Identification Number, or EIN. The EIN is like a Social Security number for your LLC; you’ll use it to file and report your LLC’s taxes. If you had one for your sole proprietorship, you’ll need a new one for your LLC. The IRS website offers an online application for obtaining an EIN, but you may need to submit a Form SS-4 instead.

6) Open a bank account for your LLC

Chances are, you’ve been using your personal bank account to manage the finances of your sole proprietorship. That won’t fly with an LLC, so you’ll need to set up a separate business account.

7) Re-apply for business licenses, if applicable

Even as a sole proprietorship, you likely had to apply for some form of self-care business license to operate. Depending on your state, you may need to re-apply for a new business license, as the state effectively views your LLC as a brand-new business. Be sure to consult a lawyer to ensure that there are no licensing conflicts once your LLC is approved.

And that’s it! Depending on how quickly you can move (and how fast your state processes documents), you’re looking at anywhere from one to three months to form your LLC. But once it’s formed, you can rest easy knowing that you and your self-care business are covered.

(The material contained in this article is provided for informational purposes only and should not be construed as legal advice.)