Founding Attorney
Your side hustle has become a real business. Clients are calling, revenue is growing, and you are starting to think about the future. But there is a problem: as a sole proprietor, there is very little protecting your personal savings, your home, or your retirement if something goes wrong. One unhappy customer, one accident, one unexpected lawsuit—and everything you own could potentially be on the line.
Converting to a limited liability company (an “LLC”) may change that. An LLC helps to create a legal barrier between your business liabilities and your personal assets, while also giving your company the credibility that customers, vendors, and lenders often expect. An Austin business attorney at the Kumar Law Firm PLLC can guide you through each step of the conversion process.
Why Convert to an LLC?
Sole proprietorships generally offer no separation between business and personal assets. If your business is sued or cannot pay its debts as they become due, creditors may be able to pursue your personal savings, home, and other assets. This risk increases as your business grows. Converting to an LLC creates a legal barrier between your business liabilities and your personal assets.
LLCs also provide credibility with customers, vendors, and lenders. Many businesses prefer working with formally organized entities. As your business grows, having an LLC in place may make it easier to bring in partners, secure financing, and eventually sell the business. The Kumar Law Firm PLLC helps business owners determine when conversion makes sense for their situation.
Forming the LLC
The first step is forming your Texas LLC by filing a Certificate of Formation with the Texas Secretary of State. You will need to choose a name that complies with Texas naming requirements and is available for use. Our attorneys may assist in determining whether a proposed business name is available at Texas Secretary of State by conducting a name availability search
To form an LLC in Texas, you will also need to designate a registered agent who can receive legal documents on behalf of the LLC, particularly service of process if the LLC is sued. This can be you, another individual, or a third party located in Texas who consents to serve as registered agent. The Kumar Law Firm PLLC prepares and files formation documents to ensure an LLC is properly organized from the start.
Creating a Company Agreement
Even single-member LLCs should have a company agreement, referred to as an operating agreement. This document establishes how the LLC will be managed, what happens if you bring in additional members, and how the LLC can be dissolved. Without a written agreement, Texas default rules apply, which may not align with your intentions.
A well-drafted operating agreement also helps demonstrate that your LLC is a separate entity from you personally. This separation is important for maintaining liability protection, as courts can disregard the LLC structure if owners fail to treat the LLC as a separate entity.
Obtaining an EIN
Most LLCs need their own Employer Identification Number from the IRS. Your newly formed LLC may need an EIN, particularly if you plan to open a business bank account (which most banks require) or hire employees. Applying for an EIN is free and in most cases can be done online through the IRS website.
The LLC’s assigned EIN may be used for the LLC’s bank accounts and any required filings. This is one of several steps that help to establish the LLC as a separate entity with its own identity.
Transferring Assets
Business assets owned by the sole proprietorship will likely need to be transferred to the LLC. Such assets may include equipment, vehicles, inventory, intellectual property, and any real estate used in the business. Transfer documents should clearly identify what is being transferred and establish the LLC as the new owner.
Some assets may require additional steps in order for title to the asset to be properly transferred. For example, while many pieces of equipment and inventory may generally be transferred by a simple assignment, for vehicles or real estate, transfers may additionally require updating titles and deeds. In addition, intellectual property such as trademarks may require additional recordation of the assignment with the relevant government agency.
Assigning Contracts
When contemplating a conversion, it is important to review existing contracts with customers, vendors, landlords, and service providers. Many contracts can be assigned to the new LLC, but some may require the other party’s consent. Leases, for example, often have provisions restricting assignment without a landlord’s consent. In addition, loan agreements may have due-on-sale clauses that could be triggered by transfer to a new entity.
Once an LLC is formed, the LLC should be the contracting party to new contracts going forward and should be signed by the manager or member of the LLC, as the case may be.
Updating Licenses and Registrations
Business licenses, permits, and professional registrations held by the sole proprietorship may need to be transferred to the LLC or reissued in the LLC’s name. You may consider contacting each licensing authority to understand their requirements. Some licensing authorities may allow simple name changes, while others may require new applications.
Opening Business Accounts
Once an LLC is formed, you may open a new bank account in the LLC’s name using the LLC’s EIN. Business owners should keep only business finances in these accounts, separate from theirr personal accounts. This separation is critical for maintaining the liability protection afforded by an LLC. Co-mingling personal and business funds may allow creditors to “pierce the corporate veil” and reach your personal assets.
In addition, you consider updating payment processing accounts, merchant services, and any other financial relationships to reflect the new LLC. Customers may be notified of new payment information as needed.
Notifying Stakeholders
Finally, if a sole proprietorship is converted to an LLC, you may consider informing your customers, vendors, insurers, and other stakeholders about the change in the business structure. You may also update your website, business cards, invoices, and other materials to reflect the LLC name. While the conversion is largely internal, communicating clearly with those you do business with helps to prevent confusion and maintain professional relationships.
You have worked hard to build your business—now it is time to protect it. The Kumar Law Firm PLLC helps Texas entrepreneurs make the transition from sole proprietorship to LLC with confidence, handling the formation paperwork, asset transfer documents, and ongoing advising on business matters as they arise so business owners can focus on what they do best. Contact The Kumar Law Firm PLLC to discuss your conversion.