If you’re ready to change your sole proprietorship to an LLC, congrats! This is a wise step in your freelance career. I recently converted from sole proprietor to LLC in 2019, and below is a detailed guide based on my own experience.
*Disclaimer: I’m a writer, not a lawyer, so this is not legal advice. Please seek out a qualified attorney to advise you on how to change a sole proprietorship to an LLC.
Let’s get started!
First, What It Means to “Change” a Sole Proprietorship to an LLC
Before we dive in, let’s clear one thing up: When you form an LLC, you’re not really “changing” your sole proprietorship—you’re starting a whole new entity. So your sole proprietorship still exists…you just stop using it and start using the LLC instead.
Step 1: Get a Registered Agent
Yes, you can be your own registered agent, but there are all sorts of reasons why you may not want to do that. I recommend hiring a registered agent using a reliable online registered agent service. With these, you pay an annual fee (usually under $60/year) to be able to use their address on your Articles of Organization, and if you get served any legal documents, they will receive them and notify you immediately.
Just Google “[your state] registered agent service.” Alternatively, your lawyer or your accountant may be able to be your registered agent. But, this is likely to be more expensive than going through a service.
Step 2: File Articles of Organization With Your State
LLCs are formed at the state level in the state(s) in which you are performing your work. So simply Google “[your state] forming an llc” and you should come across your state government site where you can file what are called “Articles of Organization.” Enter your registered agent’s information on these.
You can usually submit these online. Then, you have to wait for the government to approve it. This can take days or weeks.
Step 3: After Articles of Organization Are Approved, Get Your LLC EIN
Once you receive notice that your Articles of Organization have been approved, you can apply for an EIN for your LLC on the IRS website (it’s free). You will need this LLC EIN for the next step.
Step 4: Open a Separate Business Bank Account for Your LLC
As a sole proprietorship, you’re legally allowed to commingle funds (though it’s not recommended). For example, you can receive client checks into your personal bank account when you’re a sole proprietor. But you CANNOT do this when you become an LLC.
So, you now need to open a new business bank account for your LLC. Yes, you NEED to do this even if you already had a separate business bank account for your sole proprietorship. You need to show that separation, so you need to start anew. Open a new bank account for your LLC even if you already had one for your sole proprietorship.
I simply told my bank to close my sole prop bank account and open a new one with my LLC’s EIN. I then had my bank transfer the balance from my sole prop account to my LLC account, and this counted as my initial capitalization (funding the LLC).
Step 5: Create an LLC Operating Agreement (Optional, but Recommended)
For most states (check with yours), you are not required to have an operating agreement. However, it is highly recommended to have one, mostly because if you were ever to be sued, having an operating agreement is just one more document that can prove separation between you and your LLC. It shows you were truly trying to run your LLC as a separate entity and you were taking it seriously.
On top of that, if you are not a single-member LLC and you have other members, an operating agreement becomes necessary to outline everyone’s roles and prevent disputes.
You can find LLC operating agreements for free online. Here are a couple:
I recommend having an attorney draft your operating agreement, or in the least, having them modify your template.
Step 6: Register for Any Necessary Licenses/Permits
Now that you’ve formed your LLC at the state level, you still need to check if there are any city, county, state, or federal permits or licenses you need to register for. If you’re a freelancer, most of the time, you’ll need to get a business license with your city and possibly county.
If you had a business license as a sole proprietor, cancel that business license and get a new business license for your LLC.
Step 7: Change Everything Over (or Start Anew)
Now begins the tedious task of changing your business name everywhere. I recommend you start brand new books for your bookkeeping. I also recommend that, even if you already have a PayPal account for your sole prop, you go ahead and start a new PayPal account for your LLC.
Some things you may want to change now that you have an LLC:
- Client contracts – Ask them if you can sign a new contract or an amended contract using your LLC name. Please note: Some clients may not want to let you sign a new contract as an LLC (maybe it’s just a hassle). If this happens, you can legally still work for them and receive money into your LLC bank account. Just realize that, if the client were to sue you, they could sue you personally because your contract is between the client and you (the sole prop, not the LLC).
- W9s – You need to fill out new W9s for all of your clients using your LLC name and either your SSN or your sole prop’s EIN (if you had one). Here’s why you shouldn’t use your LLC EIN on a W9 if you’re a single-member LLC.
- Online dashboards – If you have any sort of online account for your business, change the name over to your LLC name.
- Business credit cards – I recommend getting a new business credit card for your LLC, even if you already had a business credit card for your sole proprietorship. For me, I had a Chase Business Ink card for my sole proprietorship, and after I switched to an LLC, Chase told me all I had to do was change the SSN on my business card to my LLC EIN and send them proof of the LLC EIN. But, I was advised by tax professionals that it would be better for me to close that sole prop card and apply for a new business card with my LLC EIN (which is what I ended up doing).
Step 8: Start Using Your LLC on EVERYTHING and Learn How to Sign as Your LLC
This is very important: Going forward, if you want the liability protection afforded by your LLC, you MUST sign all business items as your LLC.
That means for any client contracts, the named party must be [YOUR LLC NAME] not your first and last name. Further, when you sign the contracts, you must put [YOUR NAME], [YOUR TITLE IN LLC] [YOUR LLC NAME].
Jane Doe, Member-Manager, DoWrite LLC
If you fail to do this and you sign a client contract as yourself (your first and last name), then if the client were to sue you later, they could sue you personally since you transacted the deal as yourself and not as your LLC.
On your website and all advertising, make sure to use your LLC name. The idea is that people doing business with you should know that they are doing business with a Limited Liability Company and not with a person individually.
Step 9 (Optional): Hire a Business Attorney to Review Everything and Make Sure You Did It Right!
Yes, this is optional. There’s no law that says you have to have a lawyer when you change from a sole proprietorship to an LLC. BUT I highly recommend, in the least, hiring one to review all the paperwork and steps you took to ensure you did everything correctly.
When looking for a lawyer, make sure they are a business lawyer familiar with forming LLCs. This is a very common thing, so it shouldn’t be hard to find one.
This is a great article. Your readers might find this document that I put on Docracy helpful. It’s to be used to transfer business assets from the sole proprietor to their new LLC. https://www.docracy.com/0jz0q88fbfv/contribution-agreement-changing-from-sole-proprietorship-to-llc