How to Incorporate Your Sole Proprietorship

Many entrepreneurs begin their startup as a sole proprietorship. Eventually, some sole proprietors desire to incorporate so they can reduce their personal liability and protect their personal assets. But the act of incorporating a going business does not, by itself, transfer the current business being conducted as a sole proprietorship to the new corporation.

The 2 main issues when incorporating a sole proprietorship

The 2 main issues involve the transfer of assets from the going business to the new corporation and the tax consequences from such transfer. [This article will address the transfer and not the tax issues.] Since the assets of the sole proprietorship will need to be transferred, formal conveyances of such property must be made from the sole proprietorship to the new corporation.

The process

The first step is to incorporate the new legal entity. The next step is to execute various transfer documents by the sole proprietorship, by the new company, and some by both the sole proprietorship and the new company. In return for the conveyance of property to the new corporation, the owner of the sole proprietorship usually receives corporate shares of the new corporation.

You’re not done yet

While the transfer is now complete, additional administrative steps may need to be completed depending on the nature of the business:

-Transfer assumed name
-Handle workforce commission issues
-Close sole proprietor bank account and open account in new corporation’s name
-Make necessary changes to insurance policies
-Transfer permits and licenses
-Contractual obligations
-Apply for new federal tax ID number
-Make appropriate revisions in estate planning documents

Furthermore, while there’s no requirement to publish notices of the intent to incorporate, creditors should be notified of the sole proprietorship’s termination and the existence of the new corporation. This will help prevent liability if creditors continue to believe the business is operating as a sole proprietorship.

While incorporating a sole proprietorship may seem like a large and painful task, I believe the benefits such as reduced personal liability outweigh any headache from completing the transaction.

Tags: startup

27 Responses to “How to Incorporate Your Sole Proprietorship”

  1. Victor April 11, 2009 at 9:23 pm #

    Would it not be better to start the company as a corporation from the beginning? Then any purchases or accounts could be built on the corporation, with no liability to the startup owner. Is this a desirable action for the sole proprietor to take to head off any future headaches?

  2. Victor April 11, 2009 at 4:23 pm #

    Would it not be better to start the company as a corporation from the beginning? Then any purchases or accounts could be built on the corporation, with no liability to the startup owner. Is this a desirable action for the sole proprietor to take to head off any future headaches?

  3. Ryan Roberts April 14, 2009 at 3:41 am #

    I recommend incorporating from the beginning, but that may not be an option for some entrepreneurs either because of monetary constraints or they 'hedge' and wait to incorporate until they feel they will make it.

    It's not an absolute rule that incorporating from the start will remove all liability from the startup owner. First, you have to follow the corporate formalities. Also, most vendors/suppliers/3rd parties are reluctant to contract with new entities without some type of personal guarantee. Not always the case, however.

  4. Ryan Roberts April 14, 2009 at 8:41 am #

    I recommend incorporating from the beginning, but that may not be an option for some entrepreneurs either because of monetary constraints or they 'hedge' and wait to incorporate until they feel they will make it.

    It's not an absolute rule that incorporating from the start will remove all liability from the startup owner. First, you have to follow the corporate formalities. Also, most vendors/suppliers/3rd parties are reluctant to contract with new entities without some type of personal guarantee. Not always the case, however.

  5. Learetha Jester April 29, 2009 at 6:53 pm #

    I applied for a tin# about 2 years ago, but never used it.

    Will I need to get a new federal tax id # if I've had a tin# for about 2 years but never actually used it before to start a business?

  6. Learetha Jester April 29, 2009 at 1:53 pm #

    I applied for a tin# about 2 years ago, but never used it.

    Will I need to get a new federal tax id # if I've had a tin# for about 2 years but never actually used it before to start a business?

  7. Ryan Roberts May 1, 2009 at 11:39 am #

    Learetha-

    I'm not sure. I think a CPA/accountant can answer that. I'd contact the IRS–they have a pretty helpful site.

  8. Ryan Roberts May 1, 2009 at 6:39 am #

    Learetha-

    I'm not sure. I think a CPA/accountant can answer that. I'd contact the IRS–they have a pretty helpful site.

  9. Arthur Fishman June 16, 2009 at 7:57 pm #

    You can continue to use a existing Employer Identification Number, if the new company is an ougrowth of the original. You transfered the assets and liabilities to the Corp.

    As to starting as a Corp.
    I liken that advice telling your infant to run out of the mothers womb.

    The prudent advice is to start as a Proprietorship or partnership, see how your BUSINESS PLAN is working and then discuss with your accountant and lawyer hether you are ready for the next step.

    Closing a Proprietorship or a Partnership is much easier than closing a Corp.
    Also the recordkeeping for a Corp and the record keeping for a proprietorship is much more exacting.

    So, I would suggest start your idea, have a Accountant help you WRITE A BUSINESS PLAN, THEN work at your idea for 12 to 24 months, and if the Business is moving successfully, then Incorp.

  10. Arthur Fishman June 16, 2009 at 2:57 pm #

    You can continue to use a existing Employer Identification Number, if the new company is an ougrowth of the original. You transfered the assets and liabilities to the Corp.

    As to starting as a Corp.
    I liken that advice telling your infant to run out of the mothers womb.

    The prudent advice is to start as a Proprietorship or partnership, see how your BUSINESS PLAN is working and then discuss with your accountant and lawyer hether you are ready for the next step.

    Closing a Proprietorship or a Partnership is much easier than closing a Corp.
    Also the recordkeeping for a Corp and the record keeping for a proprietorship is much more exacting.

    So, I would suggest start your idea, have a Accountant help you WRITE A BUSINESS PLAN, THEN work at your idea for 12 to 24 months, and if the Business is moving successfully, then Incorp.

  11. John Novotny June 22, 2009 at 10:54 am #

    Arthur:

    When you say that you can use the existing EIN when the new company is an outgrowth of the old, do you mean that you can take the EIN of a proprietorship, and legacy or transfer it to a new corporation? If so, is there an IRS form that you know of to do such a transfer?

  12. John Novotny June 22, 2009 at 5:54 am #

    Arthur:

    When you say that you can use the existing EIN when the new company is an outgrowth of the old, do you mean that you can take the EIN of a proprietorship, and legacy or transfer it to a new corporation? If so, is there an IRS form that you know of to do such a transfer?

  13. Michelle October 13, 2009 at 3:59 pm #

    My husband and I established a Texas corporation a few years ago and never actually did any business under it. Recently he took out a dba untder his personal name. Is it posible to transfer this dba to an allready established corporation ??

  14. Michelle October 13, 2009 at 10:59 am #

    My husband and I established a Texas corporation a few years ago and never actually did any business under it. Recently he took out a dba untder his personal name. Is it posible to transfer this dba to an allready established corporation ??

  15. Tina November 3, 2009 at 8:46 am #

    What happens to the receivables and liabilities of the sole proprietorship when it converts to a single member LLC? Can I continue operating as is and have those transfer over?

  16. Tina November 3, 2009 at 3:46 am #

    What happens to the receivables and liabilities of the sole proprietorship when it converts to a single member LLC? Can I continue operating as is and have those transfer over?

  17. Jeff Thompson December 23, 2009 at 8:48 pm #

    I open a business 6 yrs ago as a sole proprietor with the county but never used it. Things are looking pretty good now and im looking to incorporate as a sole proprietor. Do i have to close the other business with the county before incorporating with the state? i also received an tin number 6 yrs ago. Do i have to change the entity with the irs or get an new tin?

  18. Jeff Thompson December 23, 2009 at 3:48 pm #

    I open a business 6 yrs ago as a sole proprietor with the county but never used it. Things are looking pretty good now and im looking to incorporate as a sole proprietor. Do i have to close the other business with the county before incorporating with the state? i also received an tin number 6 yrs ago. Do i have to change the entity with the irs or get an new tin?

  19. Ryan Roberts December 31, 2009 at 8:56 am #

    @ Michelle – I assume you mean county DBA (as states like Texas also have a state-DBA). I would think this is possible but I would check with the applicable county clerk.

    @ Tina – Yes, you can transfer those over.

    @ Jeff – No, you would just transfer the assets/liabilities over to the new entity. Not sure on the TIN.

  20. Ryan Roberts December 31, 2009 at 3:56 am #

    @ Michelle – I assume you mean county DBA (as states like Texas also have a state-DBA). I would think this is possible but I would check with the applicable county clerk.

    @ Tina – Yes, you can transfer those over.

    @ Jeff – No, you would just transfer the assets/liabilities over to the new entity. Not sure on the TIN.

  21. Ella T P March 8, 2010 at 5:26 pm #

    What happens to the sole prop credit card balances and loans when it incorporates? Does the new corporation now shoulder the whole loan from the sole prop? Or, if the corporation now pays for these loans, would the sole prop owe the corporation for said payments?

  22. Ella T P March 8, 2010 at 12:26 pm #

    What happens to the sole prop credit card balances and loans when it incorporates? Does the new corporation now shoulder the whole loan from the sole prop? Or, if the corporation now pays for these loans, would the sole prop owe the corporation for said payments?

  23. shyne June 20, 2010 at 8:38 am #

    i have three different businesses and me and my cousin is planning to incorporate them, would that be possible? would it need changing the names of the current businesses if they are incorporated?

  24. shyne June 20, 2010 at 3:38 am #

    i have three different businesses and me and my cousin is planning to incorporate them, would that be possible? would it need changing the names of the current businesses if they are incorporated?

  25. martha monkman October 9, 2010 at 9:36 pm #

    I have the sole prop in QB’s; do I need to start a new company file when I convert to a sole owner LLC?

  26. martha monkman October 9, 2010 at 9:36 pm #

    I have the sole prop in QB’s; do I need to start a new company file when I convert to a sole owner LLC?

  27. Mark December 15, 2011 at 1:10 pm #

    Hello, great website, I wish I found your blog before I started my sole prop. I now want to convert to a corporation. I was wondering how much should my potential partner buy from me? I have no idea about the valuation of my small business but it earns a modest income of around $500/mo. Do I register first as corporation then sell shares to my potential partner?

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