Checklist: How to Incorporate a Sole Proprietorship
One of the most common business structures used to start a business is the sole proprietorship. But sole proprietorships/Doing Business As (DBAs) aren’t popular because they’re essential or even helpful—it’s because they’re simple to form. There’s no formal action required to start a sole proprietorship, and many people own them without even knowing it. For example, if you were to start building and selling rowboats out of your garage, you would be a sole proprietor. There is legally no distinction between the business and you, the owner. Sole proprietorships are formed automatically—all you need to do to form one is sell something. In many cities, states, and counties, you can register a Sole Proprietorship business name (aka: a DBA) for as little as $5. But with a sole proprietorship/DBA, you reap all the profits and you carry the weight of all your debts, losses, and liabilities.
If you’ve been in business for any length of time, you probably already know the easy way isn’t always the best way. It’s the same with business structures. Just because you’re automatically granted a sole proprietorship doesn’t mean that’s the type of business structure you should stick with. Sole proprietorships don’t offer any liability protection and investors are reluctant to invest in them. Forming a limited liability company (LLC) or corporation, on the other hand, would afford you, the business owner, less liability and potentially make your company more attractive to investors. Plus, restructuring your business as an LLC or corporation is a straightforward process, but there are a lot of things to consider.
Below, you’ll find a checklist which highlights the steps you need to take to changing your sole proprietorship to an LLC or corporation:
- File the formation documents (Articles of Organization for LLCs; Articles of Incorporation for corporations) with the state in which you want to form your corporation or LLC.
- Dissolve the DBA with the state, city, or county in which it was formed if you filed it somewhere. In some places, this can be done online, but likely this task will require a phone call and a minimal amount of paperwork.
- For your new business entity, you’ll be required to obtain a new Employer Identification Number (EIN or FEIN) from the Internal Revenue Service. You can file online for apply on paper by filling out Form SS-4 and sending it to the IRS.
- Once you have your new EIN, you’ll need to file a last return under the old DBA with the IRS and request to close out the account for that DBA and tax id associated with it. Whomever files your taxes can help you elect to tell the IRS to close that DBA account.
- Change every account that was in the original business’ name, including bank accounts, vendor accounts, accounts payable, and mailing addresses. This is the painstaking part of incorporating your sole proprietorship. During the process, you may feel like you’re starting your business all over again, and in some respects, you are. Just try to keep in mind all that you are gaining from taking these steps. This step is very important to actually be doing business with a corporate ending to your name.
- Redesign your contact information so that your letterheads, websites, business cards, telephone listings and other contact information all has been updated to include your new business name.
While restructuring your business will take some diligence and time (you are basically starting a new business, on paper at least), you could consider it as a fresh start—without all the hassle of actually starting over. If your new business’ name is very similar to the old, the change will likely go unnoticed by the general public. The business you built will continue as before, and you can rest a little easier knowing that the money and hard work you’ve put into your business is now better protected.