How to Transition From a Sole Proprietorship to a Separate Legal Entity

You started your business with one approach in your own name and now you have made the important step to form a separate legal entity. That is a huge step. The key is to complete the transition so your business will actually benefit from the advantages you gain by forming a separate legal entity.

Over the years, we have seen several mistakes in this transition and many times where someone is still operating their sole proprietorship at the same time as their new entity without knowing about it. We wanted to clear up the steps you must complete to make the transition.

Here are the steps:

Form the separate legal entity (an LLC or corporation). NCP can help you do that (we form corporation and LLCs in all 50 states).

Obtain a NEW TAX ID Number. Even if you had a Tax ID number as a sole proprietorship you need a NEW ONE!

Open a NEW bank account in the name of the entity. Yes, even if you already have a bank account and you went from “Marketing Solutions” to “Marketing Solutions, Inc.” that is a new name and a separate legal entity and you need a NEW bank account. Yes, new checks too!

Connect the DBA (doing business as) to the new entity. When you filed the DBA in your local county you were the applicant. That is what make that business in your name. Now you need to “reconnect” the DBA to the NEW legal entity. That means you need to dissolve the DBA name linked to you and refile (the same day) the DBA name to the new entity. That means the new entity is the applicant. This is what connects it to the new entity. Now, for both tax and liability issues any business in the DBA from this point forward is under the new entity name.

Obtain a new business license in the name of the new entity. Yes, a new one. Typically, you can NOT transfer a business license from your sole proprietorship name to your new LLC. Reason? It is a separate legal entity.

Obtain a business credit card in the name of the new entity. Stop using your personal credit card cards to finance your business. Ask the bank how long does the new entity have to be in business before they would recommend you apply for a business credit card.

Update all your sources of income with the new Tax ID number of the new entity. You goal is to avoid receiving unnecessary 1099s (meaning you want the money, just not to yourself individually anymore) for affiliate or referral fees by the end of next year. Make sure all your affiliates are updated with the new entity information.

Update any contracts in the name of the new entity.

Update vendors with your new entity name and information.

Get new business cards. Don’t be cheap even if the only difference of the name of your company is “LLC”.

Set up a new chart of accounts in the new entity name.

Update your merchant account provider with the new entity information. You may have to complete new forms.

Update your insurance provider with the new entity information.

Comply and update any state related issues in the name of the new entity.

Check with your attorney or CPA for any steps missed.

This is a good list to help you get started. The biggest mistake we see is not completing updating the DBA name from your name to the new entity and using the new bank account. The goal is to get off the sole proprietorship track as fast as possible. If you add new businesses in the future you can add a new DBA name with the entity as the applicant. The key part is to be aware of the type of asset class. Safe assets like gold, investments should be owned by a separate legal entity from your operating business. Real estate should be in a separate legal entity also. If you have several properties each with a lot of equity it may make sense to split those into separate legal entities.

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