Many business owners who currently operate an existing business as a sole proprietorship desire to use a limited liability company for that business. This is the best decision a sole proprietor can make as he or she will benefit from the limited liability protection of an LLC as well as the other many LLC benefits.
Because a sole proprietorship is a business which is not housed in a current legal vehicle (such as an LLC, corporation or partnership), there is only one way to accomplish this. The sole proprietor will form an LLC and then need to transfer the individual assets and liabilities of the current business into the new LLC once formed.
Transfer of assets are typically documented with a Bill of Sale and the transfer of contracts are done by assigning the contracts. If the sole proprietor will continue to own 100% of the LLC (or at least 80%), there generally should be no significant income tax consequences but there are exceptions depending on the specific assets being transferred.
Accordingly, you should always obtain the advice of your accountant and CPA to determine any tax consequences (income taxes, sales taxes, filing fees, etc.). A good accountant may have ways to accomplish the business transfer in the most efficient way.
While a transfer from a sole proprietorship to an LLC is not difficult on paper, it is very important to notify your customers, vendors, employees and all third parties about the new business entity being an LLC moving forward.
While many sole proprietors delay this decision because they do not want to go through the transfer, the longer you wait, the more difficult and time intensive the transfer will be. In the meantime, with each day, you are subjecting yourself and your family to significant liability potential that can be minimized by using an LLC as your business vehicle.
If you are unsure about whether it is worth it to switch to using a limited liability entity such as an LLC, I am the author of a popular article which goes into the what you should be thinking about when deciding whether a limited liability company is worth the benefits you get: Form an LLC v. Sole Proprietorship
