If you're a business owner operating as a sole proprietor with a doing business as certificate, you may wonder whether you can convert your business to a limited liability company. In fact, many sole proprietors convert their business to an LLC to take the next step in distinguishing their personal affairs from those of their businesses. However, there are legal and tax requirements involved with making this change.
Many sole proprietors register their companies under their own legal names, but conduct transactions with customers and clients under a different name. Many states require a business owner who is operating under s fictitious name to register both fictitious and legal names of the company. After completing the registration process, the state issues a DBA certificate to the business owner. This requirement informs the public of the true identity of the individual or company with which they are doing business.
Many states allow business owners and other organizations to form limited liability companies, or LLCs. A major benefit of LLCs is that they provide a shield for a large proportion of personal assets of their members from legal and financial liability related to the operation of the LLC. However, the Internal Revenue Service does not recognize LLCs as a separate tax entity. This means that if you form an LLC but do not incorporate your company, you will continue to file federal income tax returns as a self-employed individual.
Converting a DBA to an LLC
To convert your DBA to an LLC, you must transfer the registration with the state to allow the LLC to operate under the same name. Most states also require sole proprietors to file a permission statement declaring that the LLC is allowed to use the name. Once you convert your business from a sole proprietorship to an LLC, your personal assets are largely shielded going forward from the date of conversion. However, any existing creditors you have are not required to deal with the LLC. If you have pledged personal assets to obtain credit before converting from a DBA to an LLC, those assets may still be vulnerable.
Obtaining an EIN
Many sole proprietors operate their businesses using their personal Social Security numbers for financial and tax purposes. This is because the IRS does not require sole proprietors who do not employ other workers and who have no excise tax liability to obtain employer identification numbers, or an EIN. However, once you convert your DBA to an LLC, you will need an EIN to file state income tax returns. If you previously obtained an EIN for your sole proprietorship, you will need a new EIN once you convert to an LLC.
- Entrepreneur: Doing Business As
- Internal Revenue Service: Do You Need an EIN?
- Internal Revenue Service: Do You Need a New EIN?
- Internal Revenue Service: Sole Proprietorships
- Internal Revenue Service: Limited Liability Company
- Bankrate.com: How to Structure a Small Business
- Armstrong Law Offices, PC: Converting a Sole Proprietorship to an LLC
- The Free Library: Converting a Sole Proprietorship Into an LLC