Completing the Transition from Sole Proprietor to LLC

Forming an LLC is as easy as filing the paperwork... unless you're transitioning an existing business from sole proprietorship to LLC. Tune in to hear the extra steps you need to take to make sure your LLC is fully up and running when you aren't starting your business from scratch.

Key Takeaways

• Your LLC only protects you if you use it properly. Filing the paperwork is just the first step to protecting your personal assets with an LLC.
• Follow the money. Make sure any money going in or out of your business goes into your business accounts and out of your business accounts or business credit cards
• Update your contracts! Switch all your clients and contractors over to working with your LLC instead of you personally, and update your contract templates with your new LLC name.

Resources Mentioned

• Watch the free masterclass
  
• Follow Amy on Instagram @artfulcontracts

Next Steps

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Episode Transcript

Forming an LLC for your business really is a simple process, and I do believe that you can do it yourself, but there are a couple steps to take after the fact, especially if you have already been running a business. A lot of people start their business not sure of where it's gonna go, so they don't form an LLC right away, and then things are going well and they decide they want to do it later. So when you take that approach, when you form your LLC after you've been running your business for a while, there are some extra steps that you need to take to make sure that you're fully transitioned from sole proprietorship over to running your business as your LLC. So that's what we're gonna talk about today. What are those extra steps that you need to take after forming an LLC if you've already been running your business?

Hey, I'm Amy Nessheim, licensed attorney for online business owners and founder of my own business, Artful Contracts. You're listening to Legal Made Easy, the show that makes the legal aspects of online business easy to understand and implement so you can grow your business with confidence knowing you've got it all covered. Let's dive in.

If you're just starting your business or debating about do I start an LLC first, do I see how it goes? Or if you're operating your business as a sole proprietorship right now, this is a great episode to help you see what you're gonna be getting into. And if you've already formed your LLC, keep listening because you might have missed some of these steps. Now, if you're listening to this and you're wondering, oh, I'm thinking about starting a business, or I just got started and I don't have an LLC, is that what I need? Should I be doing that? Did I mess this up?

First of all, there's nothing wrong with starting your business as a sole proprietorship first and then forming the LLC later. That's totally fine if that's a choice you want to make based on your risks and your assets. So go back to episode nine, and that episode explains do you really need an LLC, what it's good for, and how to make that decision. But once you're there, once you've decided to make that switch, or if you already have, that's what we're gonna talk about now. So what happens next? You have that piece of paper, you got the certificate from the state that says your LLC exists, now what?

Some of these steps are gonna be the same as if you were starting from scratch if you didn't have a business before, but I'm highlighting them just to show you that they still apply, even if you already had a business. And some of them are gonna be unique because you already had a business, so you already have things that you need to deal with that you might not if you hadn't started yet. Alright, enough of that. Let's just get into it.

The first thing is getting a new EIN. EIN stands for employer identification number. It's like your social security for your business. And I point this out because I've had people ask me, well, I already have an EIN because I used it when I was doing contractor work, or I got an EIN for my sole proprietor business. Can't I just keep using the same one? No, you have to get a new one, and the reason is because the LLC is a new business. It's like a new baby being born, and a new baby means new Social Security.

So new LLC means new EIN. And I know it's a pain in the butt because you have to change it with your payment processors and everything, but you created a new entity, you created a new legal person, so you have to treat it as unique. You have to tell the IRS that this new thing exists. And on that same token, the second step is to open a new bank account. Yes, even if you already had a bank account for your sole proprietorship, most likely you're going to have to open a new one. Now you can talk to your bank and see if they will just change ownership, but a lot of times they want you to open a new account instead of changing ownership of your old account.

So what you need to do is open a business bank account, not a personal account, that is owned by your LLC, and you're gonna have to give them that new EIN number attached to your LLC. And the next two steps involve making sure that you're actually using that bank account. So first, make sure that all of your recurring expenses are coming out of your new bank account instead of out of your old bank account or a personal account because the number one way to destroy your LLC protection is not treating your LLC as separate from yourself.

And the number one way to do that is mixing up your money. So make sure your all of your money is separated. That means tracking down all of those recurring expenses that you've been paying for your business and making sure they come out of your new bank account or a new business credit card that's owned by your LLC. And on the other side of that, switch all of your auto deposits, all of your payment processors, Stripe, PayPal to go into your new account, your new business bank account owned by your LLC.

These steps are probably gonna take a little bit of time. You might have to go through your statements, you might have to, it might take some time to track down what all of those recurring payments are, especially if you haven't been bookkeeping super closely. So that's okay, just do it as soon as you can and try to do as best you can, switching them all over as fast as possible.

The next one, again, we're still talking about money. If you haven't been, make sure that you start bookkeeping because again, keeping track of your money is really important for maintaining that LLC protection. And the best way to do that is with clean, accurate, up-to-date bookkeeping. The next step is to make sure that you transfer ownership of all of your business assets to your LLC. This is less complicated than it sounds, but here's what I'm here's what I'm talking about. So you probably have equipment that you use for your business, like the podcast mic I'm talking into right now, my MacBook, things like that. They were, you know, expensive purchases that I made with my business money. But if you did that while you had a sole proprietorship, that means you own it all because there was nothing, there was no separation between you and your business. So you need to make sure that your business owns all of that stuff.

Now I'm not just talking about tangible assets like your mic and your ring light and your computer. I'm also talking about intangible assets. Your business owns things like your trademarks, all of the content that you've created, all of your accounts receivable, which is like outstanding bills people owe you. All of those are assets of your business. And as a sole proprietorship, you owned them individually. You need to make sure that your LLC now has ownership of those things. And that is less complicated than it sounds. So that's going to be part of the formation process.

If you if you have a lawyer do it for you, they would make sure that that happens. But it also is going to be probably in a template that you get for an operating agreement. There's something called an owner's initial contribution or an owner's initial investment, and it's basically like your buy-in to your business. I did an episode on this a few a few weeks back, but you buy the ownership interest in your business by handing over ownership of all of your business assets.

So you're exchanging ownership of copyrights, trademarks, tangible items that you use for business equipment. You're giving that all to your business, to your new LLC, and your LLC is giving you 100% ownership interest. So that's gonna go on probably an exhibit to your operating agreement or a separate page that you put in your LLC binder that says what your initial contribution to the LLC is, and that's gonna be all of your assets. You can also do this with an assignment that goes in your LLC binder. If you skip this step, you can always do it later.

And again, it's just a piece of paper that says you assign ownership of all of those things and describe them all, any goodwill your business has, your trademarks, your digital assets, all of your logins to all of your online accounts, everything that you've been using to operate your business, assign ownership of all of it over to your LLC. And this is I have a template for that inside of cover your assets for my students in there. That makes it really easy. But you just want to make sure that everything that you've worked on so far in your business is owned by your LLC because otherwise it's you're not using your LLC to operate your business. You're operating your business and you have an LLC separately, and that doesn't make any sense, right?

On the same token, you also have to transition your clients and your service providers to working with your LLC by using assignments or entering new contracts with them. So that's people like your insurance provider. You have to contact them and say that you have an LLC now. Your payment processors will need your new LLC info, including your new EIN, and they might even make you close down your account and open up a new one to make sure that the ownership is with your LLC and not you individually anymore. And that's especially important with them because they do report to the IRS, so this is super important to make sure they have the right EIN. And you'll also need to update or enter new contracts with all of the contractors or service providers who do any work for you, and then also transition your clients.

And again, this is something that I teach my students inside cover your assets. We have templates for that, but you basically just have to either enter a new contract, cancel your old contract and enter a new one, or assign all of the rights and obligations under your old contracts to your LLC and have your clients sign that they agree to that.

The next thing to think about is if you have any licenses or permits for your business, which may not be relevant to an online service provider, but sometimes it is. So if you have any, you're gonna have to contact the licensing agency and transfer that license over or apply for a new one under the name of your LLC because business licenses and permits are issued to the entity, which before was you as a person, and now it's the LLC, so you're gonna have to transfer that. So just get in touch with that agency and they should be able to tell you if you can transfer it or if you need to apply all over again. And last, make sure that you update anywhere that has your official business name. I know it sounds so obvious. Anywhere that has your official business name, make sure you add the LLC onto it.

So the bottom of your website where you have the copyright symbol and your business name, now you have to include the LLC. On all of your website policies where you know it talks that it says the name of your business, now you have to include the LLC. You don't have to add LLC everywhere, you don't have to add it to your Instagram handle or anything like that. You just need to make sure that anywhere that you are using the official name of the business, anything that is official or legal, you have to have the LLC on there to make sure that people know that they're doing business with a company, with a business entity instead of with an individual.

Alright, that's my list of extra steps to take if you were operating as a sole proprietorship to complete that transition to LLC. Just a few extra steps you have to take after getting that certificate. I'm gonna run through them real quick one more time.

First, get a new EIN number, even if you already had one. Second, open a new bank account again, even if you already had one and tie it to your new EIN. Next, transfer all of your recurring expenses to come out of your new bank account or out of a new business credit card. And then on the other side, switch all auto deposits, any money coming in, make sure it's going into your new business bank account. Start bookkeeping if you haven't already. Next, transfer all of your business assets, ownership of all of your business assets, like your equipment and all of your digital assets and all of your intellectual property over to your LLC.

Check if you need to update your licenses and permits with your new LLC name. Transition all of your clients and service providers over to working with your LLC either by using assignments or using new contracts, cancel contracts, enter new ones. And last, update all of your marketing and anywhere that your official business name shows up, like go through your contract templates, like anywhere that your official business name shows up, making make sure you're using that new LLC name. That's it for today. I'll see you next week.