How to Change an LLC into a Sole Proprietorship
To change your LLC into a sole proprietorship, you'll need to transfer your LLC's assets to yourself and dissolve your LLC with the state. Going from an LLC to a sole proprietorship can help reduce future costs and paperwork, but it does mean that you’ll lose your personal liability protection. If you currently run a single-member LLC or if the other members of your LLC are exiting your business, switching to a sole proprietorship may benefit your business. We'll provide you with a step-by-step guide to converting your LLC into a sole proprietorship.
What you'll find in this article:
LLC Vs Sole Proprietorship
Steps to Convert From LLC to Sole Proprietorship
LLC to Sole Proprietorship FAQs
LLC Vs Sole Proprietorship
The main difference between an LLC and a sole proprietorship is that while an LLC is a separate business entity registered with the state, a sole proprietorship is an unincorporated business that is not registered. Because of this, there are key contrasts between an LLC and a sole proprietorship when it comes to formation, company structure, and legal standing.
- Sole Proprietorship: There’s no legal separation between you and your business, so if your business gets sued, you get sued. Additionally, you are personally responsible for all business debts.
- LLC: Because an LLC is separate entity under the law, you aren’t personally responsible for any debts that your LLC owes or any lawsuits leveled against your business. This protects your personal assets.
Paperwork and Fees
- Sole Proprietorship: With a sole proprietorship, you don’t need to file registration documents, submit annual reports, or pay any fees associated with this paperwork to the state.
- LLC: You’ll need to register your business with the state by filing Articles of Organization, submit an annual report each year, and pay the filing fees for these documents. As part of registering your LLC with the state, you’ll also have to appoint a registered agent.
- Sole Proprietorship: A sole proprietorship must be run by one individual.
- LLC: An LLC can be owned by one person, but there’s no limit to the number of owners (commonly referred to as members) that an LLC can have. Depending on the members’ preferences, single-member LLCs and multi-member LLCs
Steps to Convert From LLC to Sole Proprietorship
To turn your LLC into a sole proprietorship, all you really need to do is dissolve your LLC. If you do that, and continue selling whatever you’re selling, you’re automatically a sole proprietor. As part of the process, you may need to transfer assets and business licenses, open a new business bank account, or get a new EIN.
The steps below are general guidelines—not all steps will apply to all businesses in all states.
Step 1: Follow Internal Dissolution Procedures
The first thing you’ll need to do is look at your operating agreement, which should contain your LLC’s specific plan for dissolution.
Generally, you’ll have to:
- Hold a meeting and get member approval of the dissolution (if you own a multi-member LLC).
- Create a dissolution agreement that affirms the approval and outlines how assets will be divided or transferred among the members and/or to your sole proprietorship. This agreement must be signed by all members (if you own a single-member LLC, that’ll just be you).
- Inform any employees and make arrangements for their final paychecks. If your employees will continue to work for you after the switch, you’ll need to re-hire them.
Step 2: File LLC Dissolution Paperwork
Once the terms of your dissolution are in place, the next step is filing to dissolve your LLC with the state.
Typically, dissolution paperwork requires you to provide the following:
- Basic information about your LLC, such as its name and address
- Your LLC’s formation date
- A statement confirming your dissolution and its circumstances
- The date your dissolution will be effective
Fees to file dissolution paperwork vary by state. For example, filing in Washington State is free, but filing in New York costs $60.
A few states also require you to publish a notice of dissolution. For example, Nebraska requires dissolved LLCs to publish notice of dissolution in a newspaper for three successive weeks before the LLC is officially dissolved.
Step 3: Inform Your Registered Agent
Since you’ll no longer require a registered agent, you’ll need to contact your registered agent to let them know that your LLC is dissolving. If you’ve hired a professional registered agent service, this means canceling your service. Keep in mind that if you’re sued as a sole proprietor, the lawsuit will come directly to you, and you’ll be personally liable.
Step 4: Prepare Your Sole Proprietorship for Doing Business
As you’re wrapping things up with your LLC, you’ll need to get your sole proprietorship ready for operation.
Your preparations should include:
- Getting a new EIN from the IRS. Unfortunately, you can’t continue to use your LLC’s EIN because the IRS requires all sole proprietors who have purchased or inherited an existing business to obtain a new EIN. As a sole proprietor with no employees, you can choose to use your own SSN. However, you must get an EIN if you plan to hire employees. Many sole proprietors prefer to use an EIN for their business instead of their own SSN for privacy reasons.
- Registering a DBA. As an LLC, your legal business name is the name listed on your formation documents. As a sole proprietor, however, your legal business name is your own full name. For privacy and marketing purposes, you may wish to register a DBA (“doing business as” name). This will allow you to do business under a name like Strawberry Fields Records instead of James Paul Lennon.
DBAs are also called assumed, fictitious, or trade names, depending on the state. Typically, DBAs are registered with the Secretary of State or equivalent agency, but in some states, like South Carolina, you’ll need to register your DBA at the county level. In some states, registering a DBA isn’t required at all.
Keep in mind that you may not be able to use the exact same name as your LLC. Most states require LLC names to include a business entity identifier like “LLC” or “Limited.” However, the use of misleading words or phrases in DBAs is often prohibited by law, so you’ll have to drop the identifier. Additionally, if your desired name has already been claimed by another business, you may need to choose a different name. Some states require DBAs to be unique (within the state), while other states do not.
- Obtaining or transferring business licenses. Depending on where your business operates and what kind of work you do, you may need a business license—or several.
You’ll need to contact the licensing agencies in your jurisdiction to find out what licenses you need. You’ll also need to discover if any of your LLC’s business licenses can be transferred to your sole proprietorship or if you’ll have to get new licenses.
Professional licenses that were issued to you as an individual (for example, a massage therapy or accountancy license) won’t need to be transferred or changed.
- Open a new business bank account. You’ll need a new bank account for your sole proprietorship. Most banks will allow you to open a bank account as a sole proprietor using your DBA. To start your account, you’ll usually need to bring your SSN or EIN (whichever you’re using), all required business licenses, and a DBA certificate.
- Update your website and marketing materials. Because your business name will change, you’ll need to update your website and other marketing materials to reflect your new business name, even if just to remove “LLC.” That way, you won’t be misleading customers. In some states, you can also be fined for using an unregistered business name.
- Hire or re-hire employees. Many sole proprietors work alone, but you can hire new employees or re-hire your LLC’s employees. Regulations for hiring employees vary from state to state. Generally, you’ll need to set up payroll and tax withholding, register for unemployment tax, and purchase workers’ compensation insurance if necessary. Consult a business lawyer or CPA for the exact rules in your state.
Step 5: Notify Creditors, Vendors, and Suppliers
Once you’ve filed your LLC dissolution paperwork and organized your sole proprietorship, you’ll need to contact all creditors, vendors, suppliers, and anyone else your LLC does business with to inform them of the changes to your business.
You’ll need to:
- Receive and pay all final bills on behalf of your LLC.
- Transfer accounts to your sole proprietorship, if possible.
- Close LLC accounts and open accounts for your sole proprietorship if transfer isn’t possible.
Settling your LLC’s accounts will help you maintain good working relationships with these organizations and prevent any financial overlap between your LLC and sole proprietorship.
Step 6: File Final Tax Returns and Inform IRS of LLC Closure
Next, you’ll need to file your LLC’s final tax returns. You may need to pay federal, state, and local taxes based on the location of your business. Local and state tax requirements will vary (contact the local and state agencies in charge of tax collection if you have any questions). However, the IRS provides guidelines for meeting federal tax requirements.
According to the IRS, when closing a business, you must:
- File your LLC’s final federal tax return and pay the taxes you owe. The forms you’ll file will depend on whether you own a single- or multi-member LLC. Single-member LLCs file Form 1040 with Schedule C, while multi-member LLCs file Form 1065. If your LLC files as a c-corp or as an s-corp, you’ll need to follow the filing rules for your LLC’s tax election.
- Meet financial obligations to your workers. If your LLC had employees, you’ll need to make sure you report employment taxes and make federal tax deposits. You must also ensure that your employees receive all of their tax documents for the year, including W-2 forms and Form 8097. If you offered your employees pension or benefit plans, you’ll need to terminate retirement plans. You’ll also need to report any payments made to contract workers so that they receive Form 1099-NEC.
- Cancel your EIN and close your IRS business account. Since you won’t be able to transfer your LLC’s EIN to your sole proprietorship, you’ll need to cancel it and close your LLC’s account by sending a letter to the IRS that contains:
- The complete legal name of your LLC
- Your LLC’s EIN
- Your LLC’s business address
- The reason you want to close your LLC’s account
Send this letter along with a copy of the notice the IRS sent you when your LLC was first assigned its EIN (if you still have it) to:
Internal Revenue Service
Cincinnati, OH 45999
Your LLC’s account will be closed after all required returns are filed and all owed taxes are paid.
Step 7: Distribute and/or Transfer LLC Assets
Once your LLC’s financial obligations have been fulfilled, you can distribute or transfer your LLC’s assets as previously decided in your dissolution agreement.
In addition to the money your LLC has in its bank account, its assets may include:
- Physical Property
- Intellectual Property
- Inventory and supplies
- Customer contracts
- Debts owed by other businesses
Depending on the type and amount of assets your LLC owns, the process can take some time to complete. To avoid hiccups, we suggest enlisting a qualified CPA to help you through this aspect of converting from an LLC to a sole proprietorship.
Once you’ve either received your share of the distributions or had all of the LLC’s assets transferred to you, these assets belong to you. You can now use them to help operate your sole proprietorship.
LLC to Sole Proprietorship FAQs
Is it better to be a sole proprietor or have an LLC?
Whether it’s better to be a sole proprietor or have an LLC depends on your business. Sole proprietorship works well for low cash flow and low-risk businesses. If your line of work puts your business at risk of being sued or amassing large debts, you may prefer the liability protection offered by an LLC.
How much does it cost to change your LLC into a sole proprietorship?
The cost to change your LLC into a sole proprietorship varies by business and by state. Some states charge a fee to file dissolution paperwork for your LLC. You’ll also need to pay all taxes and debts owed by your LLC after dissolution.
If your sole proprietorship needs new business licenses, you’ll need to cover those fees. You may also have additional costs if you hire an attorney or CPA to assist with distributing or transferring your LLC’s assets.
Do you need to inform the IRS when you change from an LLC to a sole proprietor?
Yes, you will need to send a letter informing the IRS that you have closed your LLC and are canceling your EIN and business account.
Do you need a new EIN when you change from an LLC to a sole proprietor?
It depends. If your sole proprietorship will have employees or if you don’t want to use your SSN for your sole proprietorship for tax purposes, you’ll need to get a new EIN.
Who pays more taxes—LLC or sole proprietorship?
How much you’ll pay in taxes will really depend on how much you make and the kinds of assets your business has. Both sole proprietors and LLC members pay individual taxes on their business earnings and pay the federal self-employment tax rate of 15.3%. For information on taxes that is specific to your business, consult a qualified CPA.