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 7: File Annual Report and Personal Property Tax Return
- STEP 8: Securing Business Licenses and /or Permits
- STEP 9: Sort – Out Taxes
- STEP 10: Apply and Obtain Your Business Phone Number
- STEP 11: Hiring of Employees
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!