Startup Lawyer | How to Incorporate Your Sole Proprietorship
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How to Incorporate Your Sole Proprietorship

Posted 15 Jul 2008

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 Comments
  • Victor
    Posted at 21:23h, 11 April Reply

    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?

  • Victor
    Posted at 16:23h, 11 April Reply

    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?

  • Ryan Roberts
    Posted at 03:41h, 14 April Reply

    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.

  • Ryan Roberts
    Posted at 08:41h, 14 April Reply

    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.

  • Learetha Jester
    Posted at 18:53h, 29 April Reply

    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?

  • Learetha Jester
    Posted at 13:53h, 29 April Reply

    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?

  • Ryan Roberts
    Posted at 11:39h, 01 May Reply

    Learetha-

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

  • Ryan Roberts
    Posted at 06:39h, 01 May Reply

    Learetha-

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

  • Arthur Fishman
    Posted at 19:57h, 16 June Reply

    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.

  • Arthur Fishman
    Posted at 14:57h, 16 June Reply

    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.

  • John Novotny
    Posted at 10:54h, 22 June Reply

    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?

  • John Novotny
    Posted at 05:54h, 22 June Reply

    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?

  • Michelle
    Posted at 15:59h, 13 October Reply

    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 ??

  • Michelle
    Posted at 10:59h, 13 October Reply

    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 ??

  • Tina
    Posted at 08:46h, 03 November Reply

    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?

  • Tina
    Posted at 03:46h, 03 November Reply

    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?

  • Jeff Thompson
    Posted at 20:48h, 23 December Reply

    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?

  • Jeff Thompson
    Posted at 15:48h, 23 December Reply

    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?

  • Ryan Roberts
    Posted at 08:56h, 31 December Reply

    @ 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.

  • Ryan Roberts
    Posted at 03:56h, 31 December Reply

    @ 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.

  • Ella T P
    Posted at 17:26h, 08 March Reply

    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?

  • Ella T P
    Posted at 12:26h, 08 March Reply

    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?

  • shyne
    Posted at 08:38h, 20 June Reply

    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?

  • shyne
    Posted at 03:38h, 20 June Reply

    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?

  • martha monkman
    Posted at 21:36h, 09 October Reply

    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?

  • martha monkman
    Posted at 21:36h, 09 October Reply

    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?

  • Mark
    Posted at 13:10h, 15 December Reply

    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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