How do I Convert my Sole Proprietorship into a Limited Liability Company?

In order to answer the question posed in the title of this post, it's important to understand the distinction between a sole proprietorship and a limited liability company ("LLC"). The most important distinction is that a sole proprietorship is not actually a corporate entity separate from the owner, like a corporation or LLC. When someone chooses to operate their business as a sole proprietorship, they are simply running their affairs under their personal name and accept unlimited liability (i.e., your personal assets are at risk) as they carry out the nature of their work. Of course, this has inherent risks, but it is by far the cheapest option available for anyone looking to start a business.

As a sole proprietor in New York City, you can either run the business under your personal name or you may choose a trade name, like "Smith Brothers Painting;" however, for the latter, you must file a business certificate with the County Clerk in your borough. This places all other potential businesses and customers on notice, that you are operating your business under a specific trade name. When it comes to "converting" a sole proprietorship to an LLC, there is no formal process in place, like there is for converting a corporation to an LLC or vice versa. The simple reason for this is because you cannot actually convert a sole proprietorship into an LLC. I realize that this might be a bit confusing, but allow me to explain.

I used quotes above when referring to converting a sole proprietorship to an LLC because it's technically a misnomer; there is no conversion process because as I've stated earlier, a sole proprietorship is not actually a separate corporate entity. When an individual who is operating a sole proprietorship looks to then operate that same business as an LLC, they simply file the LLC and stop using the sole proprietorship. This is easier to understand when there is a trade name involved.

Using the example above, if you were running your painting business as a sole proprietorship under the trade name "Smith Brothers Painting" and you wanted to protect your personal assets and establish limited liability, you would file an LLC under the name "Smith Brothers Painting, LLC" and then withdraw the business certificate from the County Clerk's records. This would effectively "convert" the sole proprietorship to an LLC. For individuals operating their sole proprietorship in their personal name, since there are no filings with the County Clerk's office, by merely filing an LLC, the sole proprietorship is "converted," i.e., it no longer exists.

Ultimately, by ceasing to operate the sole proprietorship and forming an LLC in its place, you have essentially "converted" it. If you are looking to set up an LLC or have questions related to this "conversion" process, please give us a call or schedule a free consultation via our website and a business attorney will advise you on that process.

Disclaimer: This blog post and similar posts are not to be considered as providing legal advice. The discussion here is meant for educational and informational purposes only and shall not create an attorney-client relationship with the readers of this content.