Do you want to change your business entity from partnership to sole proprietor? If YES, here are 11 steps on how to change partnership to sole proprietorship. It is not out of place to start your business as a partnership business whether general partnership or limited partnership, but there will come a time that the partnership can no longer work hence the room for dissolution of the partnership.
Please note that when a partnership business is dissolved, the partners are expected to also liquidate their business assets, settle any liabilities, and send legal notifications to anyone that had an interest in the company. You should note that failing to complete these steps might entail you as a part business owner being held personally liable for any outstanding debts or liabilities of your partnership business.
The truth is that when a partnership business is dissolved, there are some members of the business who would want to pick up the business and build it as sole proprietorship, especially active member of the partnership.
Irrespective of the reason why the partnership business was dissolved, changing a general partnership or limited partnership to a sole proprietorship is affordable and relatively simple, and interestingly there won’t be many changes in the way you operate your business.
If indeed you have made up your mind to change your business status from general partnership or limited partnership to sole proprietorship, then you would find the 10 steps outlined below very useful;
11 Steps on How to Change Partnership to Sole Proprietorship
Table of Content
- STEP 1: Dissolve The Partnership
- STEP 2: Ensure That The Dissolution of the Partnership Follows Due Process
- STEP 3: Research to Make Sure Your New Business Name is Available in Your State
- STEP 4: Register the Business with Your State Government Office
- STEP 5: Acquire an Employer Identification number
- STEP 6: Open a Business/Corporate Bank Account
- STEP 9: Sort – Out Taxes
STEP 1: Dissolve The Partnership
The first port of call when it comes to converting a partnership is to first of all dissolve the partnership. Without that it will be illegal to change a partnership to a sole proprietorship. Each state has their own process of dissolving partnership businesses.
Please note that dissolving a partnership is an official process of permanently closing your business cum partnership. Even though filing the dissolution documentation with the state is certainly an important part of the process, it is not the only step.
STEP 2: Ensure That The Dissolution of the Partnership Follows Due Process
Another important fact to consider in this process is to be certain that all local, state and federal laws are complied with regarding the dissolution of the partnership; dues process must be followed or else it will be illegal.
For example, limited and general partnerships desiring to withdraw from Pennsylvania must obtain a clearance certificate from the PA Department of Revenue. Limited liability partnerships must obtain a clearance certificate from the PA Department of Revenue and Department of Labor and Industry.
STEP 3: Research to Make Sure Your New Business Name is Available in Your State
You must make sure that the name you want to use is not already taken. You can check if the name is unique by searching the name on your State Website. Also, make sure your business can use its name as a web domain. Even though creating a business website is not on your plan, it is best you purchase the URL to stop others from using it.
After you have registered a domain name, consider creating a professional email account. A professional email that makes use of your domain name is vital to establishing trust between your business and its customers. In this modern era where scam is on a high, companies need to make use of a professional email address to provide a sense of professionalism and credibility.
When you choose your name, then you must reserve the name. When you have chosen a name, reserve it by filling a Name Reservation form. To check the availability of a name, you can contact your state’s secretary office (some states offer an online searchable database). Another option is to have an online legal filing service do the search for you – and many sites will offer this basic search for free.
STEP 4: Register the Business with Your State Government Office
The next step is to file specific paperwork, often known as Articles of Organization, with your state office. For successful registration of your sole proprietorship business you will be required to file articles of organization. These forms will help you to set up your sole proprietorship business.
You’ll be required to provide information like:
- The name and address of your sole proprietorship business
- Your sole proprietorship business purpose. You typically won’t need to be specific here, and can even give a general answer like “The purpose of the business is to engage in any lawful activity for which a sole proprietorship business may be organized in this state.”
- The name and address of your business.
STEP 5: Acquire an Employer Identification number
An Employer identification number (E.I.N.) also known Federal Tax Identification number is a 9 – digit number similar to a social security number. The Employer identification number will be used to identify your business. It is like a social security number for your company.
An Employer Identification number is essential because you will need it to open a business account for your company, to hire employees as well as tax purposes. You can obtain your E.I.N. from the I.R.S. after creating your company.
You can do it via mail or online. Note: It won’t cost you a dime to get an E.I.N. from the I.R.S. You can obtain an EIN from the IRS either
- Via mail (approval takes 4 weeks)
- Via fax (approval takes 4 business days)
- Via online application (approval is instant at the end of the application)
STEP 6: Open a Business/Corporate Bank Account
Once the IRS has issued an EIN Number to your sole proprietorship business, you can open a business checking account. It is best practice to have a business checking account for your sole proprietorship business in order to maintain your personal liability protection.
Using a personal bank account for your sole proprietorship business is called “commingling of assets” and this can lead to personal liability issues if you end up in court. Please note that having a separate business bank account for your sole proprietorship business also makes record-keeping easier for accounting and tax purposes.
Since banks in the United States have their own rules and regulations, it is recommend calling a few places to determine the following:
- minimum initial deposit
- minimum balance requirements
- monthly maintenance fees (if any)
Required State sole proprietorship business paperwork: In order to open a business bank account for your sole proprietorship business, you will need to have the following:
- Articles of Organization (stamped and approved)
- State Business License
- EIN Confirmation Letter from the IRS
- Photo ID (driver’s license and/or passport)
- Operating Agreement (it may not be needed, but it’s a good to bring anyway)
Debit card and credit cards: Most banks will provide a business debit card on the spot after the account is opened. If not, they will usually mail the debit card in 1 to 2 weeks. Please note that if you had a business bank account for your general or limited partnership business, you will need to close that account and open a new one in the sole proprietorship business name (and with your new EIN number).
Additional tax and regulatory requirements may apply to your sole proprietorship business. These may include:
EIN: If your sole proprietorship business has more than one employee, it must obtain its own IRS Employer Identification Number (EIN). If you form a one-employee sole proprietorship business, you must obtain an EIN for it only if it will have employees or you elect to have it taxed as a corporation instead of a sole proprietorship (disregarded entity).
You may obtain an EIN by completing an online EIN application on the IRS website. There is no filing fee. Business Licenses: Depending on its type of business and where it is located, your sole proprietorship business may need to obtain other local and state business licenses.
Department of Revenue: In some cases, for example if you have employees or will be selling goods and collecting sales tax, you’ll need to register with your state Department of Revenue (DOR).
STEP 8: Securing Business Licenses and /or Permits
The next step you are expected to take is to secure your business license and permits as the case may be. The type of business licenses and / or permits your sole proprietorship business will need to legally operate in the United States of America will depend on its location and the industry it is involved in.
Please note that in order to operate your sole proprietorship business, you must comply with federal, state, and local government regulations. For example, restaurants likely need health permits, building permits, signage permits, etc. The details of business licenses and permits vary from state to state.
Make sure you read carefully. Don’t be surprised if there are short classes required as well. Fees for business licenses and permits will vary depending on what sort of license you are seeking to obtain. To find out more, contact your local agencies in the city, town or county where your sole proprietorship business is located.
STEP 9: Sort – Out Taxes
Federal taxes: sole proprietorship business have “pass through” taxation. Profits or losses flow through to your personal tax return and are usually listed on a Schedule C.
State and local taxes: sole proprietorship businesses must register and pay taxes with the state Department of Revenue, as well as your local municipality (city, town, county, etc.). Depending on the nature of your business, you may be required to register for one or more forms of state tax.
Sales Tax: If you are selling a physical product, you will typically need to register for a sellers permit through the states Combined Registration Online Application website. This certificate allows a business to collect sales tax on taxable sales.
Sales tax, also called “Sales and Use Tax,” is a tax levied by states, counties, and municipalities on business transactions involving the exchange of certain taxable goods or services.
Employer Taxes: If you have employees in some states, you will have to register for the Unemployment Insurance Tax, and the Employee Withholding Tax through your state Department of Labor, Licensing, and Regulation.
STEP 10: Apply and Obtain Your Business Phone Number
Instead of using your home telephone number or your cell phone, you can purchase an affordable “virtual business number” specifically for your sole proprietorship business. You can set this virtual business phone up to forward to your cell phone, go through voice prompts, or configure it any way you’d like.
You can check out Phone.com as they have the cheapest plans and their customer service is excellent. They offer local phone numbers as well as toll-free numbers. You can easily setup call forwarding, pre-recorded prompts, and get voicemail messages forwarded to your email.
Getting a separate business phone number for your sole proprietorship business is also a good idea in order to keep your actual number private from those pesky “public record” websites. There are many options to choose from when it comes to official phone number, but just ensure that you choose a telecom company that will better serve your business.
STEP 11: Hiring of Employees
Of course, registering a sole proprietorship business means that you will need employees and in order to get it right as regard hiring employees, you should ensure that you stay on the side of the law and here are some steps you should follow:
- Verify that new employees are able to work in the US
- Report employees as “new hires” to the State
- Provide workers’ compensation insurance for employees
- Withhold employee taxes
- Print compliance posters and place them in visible areas of your workspace
Lastly, ensure that you find out more information from your state Department of Labor, Licensing, and Regulation website.
Changing your business status from partnership business whether general partnership or limited partnership is not a daunting task. Even after forming it, there are still some things you need to put in place before you commence operation.
Please, note that the information in this article is provided only for general purpose and it is no way a legal advice. No lawyer – client relationship is established or should any such relationship be assumed. For legal advice, please consult with a professional lawyer. Best of luck!
Frequently Asked Questions
How Can You Convert A Sole Proprietorship To A Partnership?
In order to convert a sole proprietorship to a partnership, the first step to take is to draft the Partnership Deed. The most important inclusion in the deed should be the declaration about the sole proprietorship which is being converted into a partnership by adding more partners and bringing in investment.
As a matter of fact, the moment you agree to do business with someone else and share profits and losses, you have turned your sole proprietorship into a partnership, even without a written partnership agreement.
Can An Existing Single Proprietorship Be Converted Into Partnership?
Yes, an existing single proprietorship can be converted into a partnership.
Can A Sole Proprietorship Become A Partnership?
Yes, a sole proprietorship can become a partnership.
Can Two Sole Proprietors Form A Partnership?
A business with two or more owners can be a partnership.
Why Change From A Sole Proprietorship To An LLC?
The reason why you should change from a sole proprietorship to an LLC is that LLC offers its owners limited liability. By separating your personal assets from the business, you protect your own property and ensure that the business’s debts remain those of the LLC. An LLC ensures that if someone sues you, they can’t get at your personal assets. Only the assets of the business are at stake. Essentially you can get away with not having to pay corporate taxes as the LLC isn’t considered to be a separate taxable entity by the IRS.
What Is The Difference Between A Sole Proprietorship And A Partnership?
A partnership has several advantages over a sole proprietorship: It is relatively inexpensive to set up and subject to few government regulations. Partners pay personal income taxes on their share of profits; the partnership don’t pay any special taxes.
How Do You Establish A Sole Proprietorship Or A Partnership?
- Select Your Business Structure
- Create a Business Name
- Determine Availability of Your Business Name
- Register Your Business Name
- Register for Permits, Licenses, and Taxes
- Complete a Partnership Agreement
- Open a Bank Account
- Start Your Business!
How Do You Dissolve A Sole Proprietorship Or A Partnership?
When looking to dissolve a partnership (limited partnerships or general partnerships), the very first step is to consult the articles of the organization and the operating agreement. Note that the dissolution is expected to comply with the terms of the articles of organization or the operating agreement. If dissolution is not covered in either of these documents, state law applies by default, and a meeting of the partners is called.
Nonetheless, a resolution to dissolve the partnership (limited partnerships or general partnerships) must be adopted by the partners if a previous agreement wasn’t covered. The law in the state of Pennsylvania requires all partners to agree to the dissolution in writing if neither the articles of organization nor the operating agreement detail a method for dissolution.
Can You Change The Name Of A Sole Proprietorship?
Yes, you can change the name of a sole proprietorship, and the procedure necessary to effect the change of a proprietor’s name on a Business Name Form is as follows;
- Prepare a duly completed application form for the change of name.
- Attach the Affidavit in support of the change of name.
- Attach updated annual returns if the business is due to file Annual Returns.
How Do You Change An Existing Partnership To An LLC?
There are different methods to follow if you want to change an existing partnership to an LLC. The first is to form a new LLC, dissolve the partnership, and transfer all the partnerships assets and liabilities to the new LLC. The second method, available in many states, is to file a form with the state agency in charge of business entities that converts the partnership into an LLC.
Can Sole Proprietorship Convert To LLP?
Well, since it has only one person, a sole proprietorship cannot be directly converted into an LLP. It can be either done by closing the proprietorship and registering an LLP or by including another person in the business and making him a partner and then converting it to an LLP.
Is LLP Better Than Sole Proprietorship?
Unlike the sole proprietorship, the limited liability partnership has a distinct legal personality. This means that the entity can sue or be sued, enter into contracts, and own property in its own name. An LLP has perpetual succession and does not cease to exist if one or more of its partners dies.
What Is The Difference Between Sole Proprietor And Partnership?
A sole proprietorship has one owner, while a partnership has two or more owners. Sole proprietorships and partnerships are common business entities that are simple for owners to form and maintain. When you have a partnership, you will work with at least one co-owner.
Can A Sole Proprietor Have A Partner?
Legally, a sole proprietor cannot have a partner because the moment you agree to do business with someone else and share profits and losses, you have turned your sole proprietorship into a partnership, even without a written partnership agreement
How Do I Change The Percentage Of Ownership In An LLC?
With an LLC, you probably won’t need to file updated paperwork with your state, but that depends on whether or not your original incorporation paperwork included the names and ownership percentages of your partners. If it does, you’ll need to fill out an amendment with the new names and percentages.
Can Partnerships Have Different Ownership Percentages?
General partnerships are often split 50-50, but some partners agree to have different percentages of ownership so there is no standstill if disagreements arise on decisions. In some cases, partnerships include a 1-percent owner in order to have a third party who can make decisions in the case of ties or deadlocks.
What Are The Advantages Of A Sole Proprietorship Over A Partnership?
Actually, here are the main benefits of a sole proprietorship over a partnership: It’s easier and cheaper to form. It has fewer government regulations. As a sole owner, you have complete control over your business.
Can Sole Proprietorship Have Two Owners?
You cannot have more than one owner with a sole proprietorship. As its name implies, a sole proprietorship can have only one sole owner.
Can You Change Partners In A Partnership?
Yes, you can change partners in a partnership.
Does Partnership Income Have To Be Split 50 50?
When creating your partnership agreement, all the partners in the business need to agree on how to share profits. If you form an equal partnership (50-50) between two people, you will both need to make decisions regarding profit-sharing together and will need each partner’s approval to make these decisions.
What Are The Disadvantages of Owning a Sole Proprietorship?
You have unlimited liability for debts as there’s no legal distinction between private and business assets. Your capacity to raise capital is limited. All the responsibility for making day-to-day business decisions is yours. Retaining high-caliber employees can be difficult.
Is Self Employed And Sole Proprietorship The Same?
Yes, a sole proprietor is self-employed because they do not have an employer or work as an employee. Owning and operating your own business classifies you as a self-employed business owner.
Can an LLC Have Two Owners?
The multi-member LLC is a Limited Liability Company with more than one owner. It is a separate legal entity from its owners, but not a separate tax entity. A business with multiple owners operates as a general partnership, by default, unless registered with the state as an LLC or corporation.
How Do You Remove Someone From A Partnership Business?
There are only two ways in which a partner can be removed from a partnership or an LLP. The first is through resignation and the second is through an involuntary departure, forced by the other partners in accordance with the terms of a partnership agreement.
How Do You Dissolve A Partnership Without An Agreement?
The partner must provide the notice in writing and the partnership will dissolve from the date specified on the notice. If no date is mentioned, the dissolution will take place from the date of communication of the notice. Additionally, in some cases, the court may give an order to dissolve a partnership as well.
How Do You Get A Business Loan As A Sole Proprietorship Or As A Partnership?
For sole proprietors, term loans can be found at banks and credit unions but it may be easier to get approved for one through an online lender. As far as what you can use a term loan for, they can cover both near-term or long-term expenses.
Do Banks Give Loans To Partnerships?
Unlike financing options for larger corporations that rely upon the overall creditworthiness of the company itself, loans for small businesses, particularly partnerships and sole proprietorships, require the owner or owners to make personal guarantees for the amount borrowed.
Can You Change Your Sole Trading Name?
Well, if you are a sole trader (or sole proprietor), you operate your business either under your own name or under a fictitious business name. Generally, you must change the legal name of your business by notifying taxing authorities and other agencies you registered your business with.
Can I Change DBA Name?
If your business is a sole proprietorship or partnership and you want to change your DBA, you can do so by: Canceling the existing DBA and filing for a new one. Finding out from the IRS if getting a new DBA will require applying for a new Employer Identification Number (EIN). Notifying the IRS of the new DBA.
Can A Sole Proprietor Have More Than One Business?
You can have multiple businesses under one sole proprietorship, each reflected on separate Schedule Cs on a personal income tax return, but the business entities must have activities that are very different from each other— perhaps a barbershop and a construction company.
Can A Sole Proprietor Pay Himself A Salary?
Sole proprietors are considered self-employed and are not employees of the sole proprietorship. They cannot pay themselves wages, cannot have income tax, social security tax, or Medicare tax withheld, and cannot receive a Form W-2 from the sole proprietorship.
Can Your Business Partner Sell Without Your Consent?
It depends, but if your business is a limited liability company or general partnership, your partner can’t sell the company without your consent. He may, however, sell his interest in the company if you don’t have a buy-sell agreement.
What Taxes Do Sole Proprietors Pay?
Self-Employment Taxes – Sole proprietors must pay the entire amount themselves (although they can deduct half of the cost). The self-employment tax rate is 15.3%, which consists of 12.4% for Social Security up to an annual income ceiling (above which no tax applies) and 2.9% for Medicare with no income limit or ceiling.
When Will You Be Required To Obtain A New EIN?
Generally, businesses need a new EIN when their ownership or structure has changed. Although changing the name of your business does not require you to obtain a new EIN, you may wish to visit the Business Name Change page to find out what actions are required if you change the name of your business.
Do I Need To Change EIN For LLC?
Yes, if you have an existing Sole Proprietorship with an EIN and you want to change your Sole Proprietorship to an LLC, you will need a new EIN from the IRS. Therefore they require that you get a new EIN for your LLC.