How to Switch from a Sole Proprietorship to an LLC: Everything You Need to Know

In this guide, we’ll take you through how to switch from a sole proprietorship to an LLC, explaining everything from filing the necessary paperwork to updating your business bank accounts, tax IDs, and contracts.

There are 3 common scenarios where a sole proprietorship makes sense in a business set up.

First, if you’re just starting out and want to keep things simple, a sole proprietorship requires minimal paperwork and has no formal setup costs. 

Second, if you’re running a one-person business with no employees or partners, this structure allows you to operate with full control and fewer compliance requirements. 

Third, if you’re testing your business idea before committing to a more structured entity, a sole proprietorship lets you get started quickly without long-term legal obligations.

But what if you’ve already set up an LLC and now feel like it’s not the right fit? Can you switch back to a sole proprietorship? And if so, what’s the process? This guide lays it all out, step by step.

And if you’re still unsure which business structure makes the most sense for your situation, book a free consultation with our experts. We’ll walk you through your options and help you figure out the best setup for your business.

Why Switch From a Sole Proprietorship to an LLC?

For many entrepreneurs, a sole proprietorship is the natural starting point. It’s simple, requires minimal paperwork, and lets you get your business up and running quickly. But as businesses grow, so do their risks, and this is where a flexible structure matters.

An LLC (Limited Liability Company) offers legal, financial, and operational advantages that can position your business for sustainable growth. 

Here’s why you should switch from a sole proprietorship to an LLC:

1. Liability Protection

A sole proprietorship does not distinguish between you and your business. If your business faces lawsuits, debts, or liabilities, your personal assets like home, savings, investments get all exposed.

But an LLC creates a legal separation, protecting your personal wealth from business-related risks.

2. Credibility and Growth Opportunities

An LLC signals legitimacy and stability in a way that a sole proprietorship does not. Investors, lenders, and larger clients are more inclined to work with an incorporated entity, giving you greater access to capital, strategic partnerships, and high-value contracts.

3. Tax Flexibility

Unlike sole proprietors, who must pay self-employment tax on all earnings, LLCs offer flexibility in tax treatment.

Depending on your business model, you can elect to be taxed as a sole proprietorship, partnership, S-Corp, or even C-Corp, enabling strategic tax planning that aligns with your financial goals.

4. Operational Scalability

Sole proprietors often struggle with expansion, hiring, and ownership transitions. LLCs offer a structured framework that allows you to bring in partners, attract investors, and implement succession planning without compromising business continuity.

Key Steps: How to Switch from a Sole Proprietorship to an LLC

Convinced by the benefits that an LLC setup offers?

Let’s walk you through the steps to smoothly transition from a sole proprietorship to an LLC:

Step 1: Choose a Business Name

Your LLC needs a legally distinct name that complies with your state’s requirements. In most cases, the name must:

• Be unique (you can check availability through your state’s business registry).

• Include “LLC” or “Limited Liability Company” in the official name.

• Avoid restricted words (e.g., “Bank” or “Insurance” unless applicable).

If you want to rebrand during this transition, this is the time to do it. Otherwise, if your current business name is available, you can file for a DBA (Doing Business As) to continue using it under your new LLC structure.

Step 2: File Articles of Organization

To officially form your LLC, you need to file Articles of Organization (also called a Certificate of Formation in some states). This document establishes:

• Your business name

• Your registered agent (a person or service that receives legal documents on your behalf)

• Your business address

• Your LLC’s management structure (member-managed or manager-managed)

Filing fees vary by state, typically ranging from $50 to $500. Once approved, your LLC is legally recognized. You can reach out to our formation experts if you need to file Articles of Organization. 

Step 3: Obtain an EIN (Employer Identification Number)

An EIN (Employer Identification Number) is like a Social Security Number for your business. Even if you already have an EIN as a sole proprietor, you need a new one for your LLC.

You’ll need an EIN to:

• Open a business bank account

• Hire employees

• File business taxes

You can apply for an EIN for free through the IRS website or you let doola’s formation experts obtain it for you.

Step 4: Update Business Licenses & Permits

Switching to an LLC may require you to update or reapply for business licenses and permits. This depends on:

• Your industry (e.g., health, construction, and finance businesses often have stricter licensing requirements).

• Your state and local regulations (some states require additional filings for LLCs).

If your business already holds permits or licenses, check with the issuing agency to update your business structure in their records.

Step 5: Update Business Bank Accounts & Finances

An LLC creates a separate legal entity, which means your personal and business finances must be kept separate. If you’ve been using a personal bank account for your business as a sole proprietor, now is the time to open a new business bank account under your LLC’s name.

This not only helps maintain clear financial records but also reinforces the legal protection that comes with an LLC. 

Additionally, don’t forget to update your payment processors like PayPal, Stripe, or any other platforms you use for transactions so that they reflect your new business structure.

Step 6: Revise Contracts & Agreements

All existing contracts, agreements, and vendor relationships under your sole proprietorship need to be updated with your LLC’s new legal name. 

This includes:

• Client contracts

• Supplier/vendor agreements

• Employee and independent contractor agreements

• Lease agreements (if applicable)

If your business operates under long-term contracts, notify the other party and amend the agreement to reflect your LLC’s new structure.

Common Mistakes to Avoid When Transitioning to an LLC

Here are some common mistakes to avoid when making the transition to an LLC:

Failing to Separate Personal and Business Finances

One of the biggest advantages of an LLC is limited liability protection. But that protection can disappear if you mix personal and business finances.

In short, if your finances are intermingled, courts may ignore your LLC status in legal disputes, putting your personal assets at risk.

Simply forming an LLC isn’t enough; you need to open a dedicated business bank account, apply for a business credit card, and ensure all transactions go through your LLC.

Not Updating Contracts and Agreements

A common oversight is forgetting to update existing contracts. If your business has client agreements, vendor contracts, or even lease arrangements under your sole proprietorship, you need to amend them to reflect your new LLC name. 

Without this, legal and financial issues can arise if there’s ever a dispute. Make sure all agreements reference your LLC as the legal entity moving forward.

Assuming Your EIN Transfers Over

If you already had an EIN (Employer Identification Number) as a sole proprietor, you might think you can continue using it for your LLC. That’s not how it works. 

The IRS requires a new EIN when you switch from a sole proprietorship to an LLC. Using the old one could lead to tax filing complications and IRS penalties.

Neglecting Tax Elections and Compliance

Just forming an LLC doesn’t mean your tax obligations remain the same.

 LLCs offer tax flexibility, allowing you to be taxed as a sole proprietorship, partnership, or even an S-Corp. However, if you don’t file the right tax election forms, the IRS will default to the standard classification, which may not be the most tax-efficient choice for your business. 

Consult a tax professional from doola to ensure you’re making the right decision.

How doola Can Help With LLC Formation & Compliance

Establishing and running an LLC doesn’t have to be a daunting process. doola makes it easy for entrepreneurs like you, whether you are in the US or overseas, to start and sustain a legally compliant business. 

Here’s how we help:

Hassle-Free LLC Formation:

We handle everything from filing your LLC paperwork to obtaining your Employer Identification Number (EIN) and appointing a registered agent, ensuring your business is set up correctly.

Business Banking & Finances Made Easy:

Get assistance with setting up a U.S. business bank account, managing payment processors (PayPal, Stripe, etc.), and keeping your finances organized with bookkeeping tools.

ITIN & Tax Support for Global Entrepreneurs:

If you’re a non-U.S. resident, we help you apply for an ITIN (Individual Taxpayer Identification Number) and navigate tax obligations with expert-backed support.

• Full Business Support: Whether you need a U.S. business address, CPA consultations, or personalized guidance, doola provides end-to-end support to keep your business running smoothly.

Ready to start your LLC the right way? Book a free consultation with our experts today!

FAQs About Switching from a Sole Proprietorship to an LLC

How long does it take to transition to an LLC?

The timeline varies by state but typically takes a few days to a few weeks. Expedited filing options are available in some states for faster processing.

Do I need a new EIN when switching to an LLC?

Yes, the IRS requires a new EIN when transitioning from a sole proprietorship to an LLC, as your business is now a separate legal entity.

How does an LLC impact my taxes compared to a sole proprietorship?

An LLC offers tax flexibility. By default, it’s taxed similarly to a sole proprietorship, but you can elect to be taxed as an S-Corp or C-Corp, which may provide tax advantages depending on your income and structure.

Can I switch back to a sole proprietorship later if needed?

Yes, but it requires dissolving your LLC according to state regulations and closing any related tax accounts. The process varies by state and may involve filing dissolution paperwork.