How to Convert a Sole Proprietorship to an LLC in Texas

When your business is just starting, operating as a sole proprietor often makes sense. But as the business grows, switching from a sole proprietorship to single-member LLC is a wise choice and, thankfully, a simple one.

Keep reading to learn how to convert a sole proprietorship to a Texas LLC.

It can be hard to know if changing from a sole proprietorship to an LLC is the right choice for your business. Before we get into how to make the switch, let's look at the key points of each business structure below.

Sole Proprietorship

• Owned by one person
• Considered one in the same as the owner (not a separate legal entity)
• Owners are personally responsible for all business losses and liabilities
• Easy to create (simply file a assumed name certificate at the county level)

Limited Liability Company (LLC)

• Can be owned by one or more people
• Separate legal entity than the owner(s)
• Creates a barrier between the business liabilities and the owner(s) assets
• Creates a barrier between the owner's personal liabilities and the business assets.
• Potential for tax advantages
• Flexibility with taxation, ownership, and control

Read more about the benefits of a Texas LLC.

Here's what surprises most people: Texas has no filing that converts a sole proprietorship into an LLC. A sole proprietorship isn't a separate legal entity, so the Secretary of State's Certificate of Conversion (Form 630) doesn't apply. Instead, you create the LLC from scratch and move the business into it. The process is simple and follows these steps.

1. File a Certificate of Formation. Form the LLC by filing a Certificate of Formation with the Texas Secretary of State. The state filing fee is $300.
2. Adopt a Company Agreement. After the Secretary of State accepts the Certificate of Formation, the managers (or members in a member-managed LLC) hold an organizational meeting and approve and sign the LLC's governing document, called the Company Agreement.
3. Get an EIN and open an LLC bank account. The LLC needs its own bank account so business and personal funds stay separate. See the EIN question below to find out whether you need a new EIN.
4. Transfer the business assets to the LLC. Formally assign the sole proprietorship's assets (including the business name) to the LLC and have the LLC assume the applicable liabilities. Real estate requires a deed, contracts require an Assignment and Assumption Agreement, and most everything else can be transferred with a Bill of Sale.
5. Update licenses, permits, and accounts. Move business licenses, insurance policies, leases, and vendor and customer accounts into the LLC's name. If you collect sales tax, the LLC must apply for its own Texas sales tax permit, because the Comptroller treats the move to an LLC as a change in ownership and permits can't be transferred. Close the sole proprietorship's permit once the LLC's permit is in place.
6. Abandon the sole proprietorship's assumed name. Withdraw or abandon the sole proprietorship's Assumed Name Certificate (also known as a DBA, short for "doing business as"), which should have been filed with the county clerk's office. This keeps a future plaintiff from using the old DBA as a reason to sue you personally. In other words, it makes clear that any future lawsuit should be against the LLC, not the sole proprietor.

Not hard. Most of the work is forming the LLC itself, and the Texas Secretary of State typically approves a Certificate of Formation in 3 to 4 business days. After that, the remaining steps are paperwork: signing the Company Agreement, moving assets and accounts into the LLC's name, and abandoning the old assumed name. Your customers, phone number, and day-to-day operations don't have to change at all.

An LLC gives you liability protection a sole proprietorship can't, but it does come with a few tradeoffs:

• Filing fee. The state charges $300 to file the Certificate of Formation.
• Annual reports. Every Texas LLC must file a franchise tax report each year. Most small LLCs fall below the Comptroller's no tax due threshold (currently $2.65 million in annual revenue) and owe no franchise tax, but they still must file a Public Information Report.
• Separate finances. Business and personal money must stay strictly separate. Mixing funds can weaken the liability protection that is the main reason to form an LLC.
• More paperwork. An LLC needs a Company Agreement, its own bank account, and records that show it operates as a separate business.

For most growing businesses, these costs are small compared to the protection an LLC provides.

The cost to convert a sole proprietorship to a Texas LLC is equal to the filing fee of the LLC ($300) plus the service fee if you have someone create the Texas LLC for you.

Additionally, you will want to abandon the sole proprietorship's DBA if the LLC name is going to be the same as the old sole proprietorship's name.

Lastly, if any assets need to be transferred to the new LLC, you will want to document the transfer. Real estate would require a deed; Contracts would require an Assignment and Assumption Agreement (or Amendment); and almost everything else can be transferred via a Bill of Sale. We typically charge $125 to $200 for these documents.

Learn more about the costs of creating a Texas LLC.