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 LLC is a wise choice and, thankfully, a simple one to make.
Keep reading to learn how to convert a sole proprietorship to a Texas LLC.
Sole proprietorship vs. LLC: What's the difference?
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.
- 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.
How to convert a sole proprietorship to a Texas LLC
Converting a sole proprietorship to an LLC is easy. You simply file the same paperwork you would if you were creating the LLC from scratch.
In Texas, this means you must file a Certificate of Formation with the Texas Secretary of State. After the Texas Secretary of State accepts the Certificate of Formation, the managers (or members in a member-managed LLC) need to have an organizational meeting and approve and execute the governing document (aka Company Agreement).
Once the LLC is created, you would want to formally assign any sole proprietorship assets (including the name) to the LLC and assume applicable liabilities.
The last step is to withdraw or abandon the sole proprietorship's Assumed Name Certificate (also known as a DBA which is short for "doing business as"). The DBA should have been filed with the county clerk's office. The purpose of abandoning the sole proprietorship's DBA is to preclude a future plaintiff from using the sole proprietorship's DBA as a justification to sue the sole proprietor in their personal name. In other words, you need to make it clear that any future lawsuit should be against the LLC and not the sole proprietor.
How much does it cost to convert a sole proprietorship to a Texas LLC?
The cost to convert a sole proprietorship to a Texas LLC is equal to the filing fee of the LLC ($308.10) plus the the service fee if you have someone create the Texas LLC for you.
Learn more about how much it costs to create a Texas LLC.
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 there are any assets that 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 - $200 for these documents.
If you'd like to hire us to convert your sole proprietorship to an LLC, you can use the following link to create your Texas LLC (please mention "converting from a sole proprietorship" in the comments section at the end of the questionnaire).
If you'd prefer to discuss first, you can get in touch with us via our contact form at your convenience.