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 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
-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.