Converting a New York or New Jersey Sole Proprietorship to an LLC

Dr_Martens,_black,_old.jpgNew York and New Jersey laws provide a wide range of options regarding the organization and structure of businesses, with recognition that the needs of a small, one- or two-person operation are likely to be substantially different from those of a much larger business. Businesses with no formalized legal structure are known as sole proprietorships if they have only one owner, and general partnerships if they have two or more. An informal business structure works for many business owners, but the business entities defined by state law have certain benefits that everyone should consider. Converting a business from a sole proprietorship to a limited liability company (LLC) can be an effective way for a business owner to protect both the business and themselves.

Sole Proprietorship vs. LLC

Operating a business as a sole proprietorship may offer some advantages:

– Simplicity: There is no need to file any specific paperwork with the state to maintain the business, aside from an assumed business name, also known as a “DBA.”

– Only one tax return: A sole proprietorship, unlike a corporation, does not file its own tax return. The business owner includes business income and expenses in a schedule attached to his or her personal return.

These possible advantages, however, come with some distinct disadvantages:

– The owner of a sole proprietorship is personally liable for any and all business debts.

– Similarly, business assets are susceptible to claims against the owner as an individual.

– A sole proprietor must keep meticulous records distinguishing personal and business assets, debts, and expenses.

The LLC structure offers many of the benefits of a corporation, without some of the details that might make a corporation unappealing to a small business owner. The LLC structure protects owners, known as “members,” from personal liability, and it protects business assets from claims against the owners. Both New York and New Jersey have enacted LLC statutes. New Jersey’s statute is based on the Uniform Limited Liability Company Act that has been enacted in 10 other states and the District of Columbia.

Tax Issues

LLCs are typically taxed like partnerships, but members may elect to be taxed like a C or S corporation. Single-member LLCs, however, are treated as “disregarded entities” by the IRS, meaning a member reports income and expenses in his or her personal tax return, as in a sole proprietorship.

So what must a sole proprietor do to convert a business to an LLC?

Organization Paperwork

Many states used to require a business owner who was converting a business to a corporation or other entity to place a notice in the newspaper, based on the idea that converting to an entity that would shield the owner from personal liability was a matter of public concern. Today, a business owner only needs to file paperwork with the New Jersey Department of the Treasury or the New York Department of State to begin the process of converting his or her business.

Transfer of Business Property, Licenses, and Contracts

The business owner must transfer the set of assets, liabilities, and obligations that comprise the actual “business” to the newly created business entity. This requires a careful inventory of business interests, as well as the consent of other parties in some cases. The transfers must include:

– Title to assets, such as vehicles, equipment, real property financial accounts, and copyright or trademark registrations;

– Business licenses, including permits issued by city, county, or state governments;

– Licenses or permits from local or state tax authorities, such as a sales tax permit;

– Contracts for ongoing vendor services, clients or customers, and employees; and
– Lease agreements for real property.

Business law attorney Samuel C. Berger represents businesses and entrepreneurs in the New York City and Northern New Jersey areas. We offer fixed-fee legal-service packages that address a variety of our clients’ legal needs. To schedule a confidential consultation with member of our team, contact us today online or at (212) 380-8117.

More Blog Posts:

Corporate Recordkeeping for Small Business Owners, New York & New Jersey Business Lawyer Blog, September 15, 2014
Benefit Corporations Allow New York and New Jersey Businesses to Combine Profits with the Public Good, New York & New Jersey Business Lawyer Blog, August 4, 2014
New York City Sets Aside Over $1 Million for Worker-Owned Cooperative Businesses, New York & New Jersey Business Lawyer Blog, July 7, 2014
Photo credit: Tarquin [GFDL or CC BY-SA 3.0], via Wikimedia Commons.