Converting Your Illinois Sole Proprietorship to an LLC in 2024

by
Convert Illinois Sole Proprietorship to LLC

As a small business owner in Illinois, you may have started your business as a sole proprietorship due to its simplicity and low initial costs. However, as your business grows, you may want to start an LLC in Illinois, which is more suitable for your needs. Converting your Illinois sole proprietorship to an LLC can protect your assets and optimize your business’s growth potential.

In this comprehensive guide, Webinarcare Editorial Team will walk you through the step-by-step process of Converting your Illinois Sole Proprietorship to an LLC, enabling you to make an informed decision for your business.

How to Convert your Illinois Sole Proprietorship to an LLC

What is a Sole Proprietorship and Limited Liability Company?

A sole proprietorship is the simplest and most common form of business ownership, where a single individual owns and operates the entire business. A sole proprietorship has no legal distinction between the owner and the business, meaning the owner is responsible for all the business’s debts, liabilities, and obligations. 

On the other hand, a Limited Liability Company (LLC) is a legal business structure that combines the limited liability protection of a corporation with the pass-through taxation of a sole proprietorship or partnership. This means the owners, known as members, are not personally responsible for the company’s debts and liabilities. The company’s profits and losses are reported on the members’ tax returns. We reviewed some of the Best LLC Services and provided features as an add-on with their packages for you to check out.

LLC Service

Rating & Pricing

Top Features

Learn More

#1 Recommendation

$0 + State fee

  • Free LLC Formation

  • Legal Support

  • Highly Reputed Company

Learn More

$299 + State fee

  • Single LLC formation package

  • Flat price for all services

  • Legal consultation

Learn More

Having a sole properietorship had given you freedom and comfortability, but, starting an LLC in Illinois has a lot to offer, which is why it is a highly recommended business structure. It is suggested that you speak with a legal professional first before you begin coverting your sole proprietorship to an LLC. They will understand what’s best for you and your company.

– WEBINARCARE EDITORIAL TEAM

Steps on Converting Illinois Sole Proprietorship to an LLC

To convert Illinois sole proprietorship to an LLC, you must follow the guidelines that include choosing a name for your LLC, appointing a Registered Agent, preparing for the Articles of Organization, creating an Operating Agreement, obtaining an EIN, opening a business bank account, registering for state tax and licenses, and lastly, informing clients and vendors of conversation.

Step 1: Choose A Name For Your LLC

The first step in converting your sole proprietorship to an LLC is selecting a unique and distinguishable name for your new entity. In Illinois, there are specific naming requirements and restrictions that you must adhere to when choosing your LLC’s name:

  • The name must include “Limited Liability Company,” “LLC,” or “LLC.“
  • The name cannot include words or phrases that imply the company is engaged in activities it is not authorized to conduct.
  • The name must be distinct from other registered businesses in Illinois.

In Illinois, if you do not wish to file your LLC right away but want to hold the name that you have decided on, then you can reserve your LLC name for 90 days. You must file a name reservation application in the Illinois Secretary of State to keep the name. 

You can register your business under a different legal name if your preferred name isn’t available. Once you have chosen a name, you can submit an application for a DBA (doing business as). In this manner, you can choose any name you desire for your business. A DBA allows a company to operate under the name of the person or entity who owns it. If you have decided to file for Illinois DBA, you can file it in three methods, online, by mail, and in person filing. However, before filing a DBA, you should know that you need to renew your DBA from up to Indefinite, which costs around $50.

You can check the availability of your desired business name by searching the Illinois Secretary of State Corporation/LLC Search‘s website.

Step 2: Appoint a Registered Agent

In Illinois, all LLCs are required to appoint a Registered Agent. Registered Agent is a person or entity responsible for receiving and forwarding legal and tax documents on behalf of your Illinois LLC, such as service of process, Illinois Annual Report, and state tax notifications. Your Registered Agent must have a physical address in Illinois and be available during regular business hours. In Illinois, the cost of Registered Agent usually ranges from $50 – $200.

When selecting a Registered Agent, consider their reliability, knowledge of state requirements, and ability to manage sensitive legal documents. You can serve as your own Registered Agent, appoint another individual, or hire the Best Registered Agent Service.

Step 3: Prepare and File the Illinois Articles of Organization

To officially form your Illinois LLC, you must prepare and file Illinois Articles of Organization with the Illinois Secretary of State. The Articles of Organization is a legal document that outlines essential information about your  Illinois LLC, including:

  • The LLC’s name
  • The Registered Agent’s name and address
  • The LLC’s purpose
  • The LLC’s duration (perpetual or for a specific term)
  • The names and addresses of the initial members or managers

In Illinois, the filing fee for the Articles of Organization is $150. You can submit the document online through the Illinois Secretary of State’s website or by mail. Processing times may vary, so check the website for current information.

Step 4: Create an Operating Agreement

Although not legally required, Illinois Operating Agreement is a crucial document that outlines the structure, management, and financial arrangements of your Illinois LLC. The operating agreement should include the following:

  • The roles and responsibilities of members and managers.
  • The process for admitting or removing members.
  • The allocation of profits and losses among members.
  • The procedure for making major decisions.
  • The process for dissolving the LLC.

Having a written Illinois operating agreement can help prevent disputes and ensure a smooth operation of your LLC. It is advisable to work with Illinois Business Attorney to draft an operating agreement that meets the specific needs of your business and complies with Illinois laws.

Step 5: Obtain an Employer Identification Number (EIN)

An Employer Identification Number (EIN) in Illinois, or Federal Tax Identification Number, is a unique nine-digit number issued by the Internal Revenue Service (IRS) to identify your business for tax purposes. With an EIN, you can open a business bank account, file tax returns, and hire employees.

To obtain an EIN for your Illinois LLC, you can apply online on the IRS website, by mail, or by fax. The online application process is the fastest and most convenient method, as you will receive your EIN immediately upon completing the application. There is no fee to obtain an EIN.

The application of an EIN in Illinois can be through the following:

  • Apply Online- The online EIN application is the preferred method for customers to apply for and obtain an EIN.
  • Apply by Fax- Taxpayers can fax the completed Form SS-4 application to the appropriate fax number), after ensuring that the Form SS-4 contains all of the required information.
  • Apply by Mail- The EIN application Form SS-4 can be filed via mail. The processing time frame to receive the mail is four weeks.
  • Apply by Telephone-International Applicants – International applicants may call 267-941-1099 (not a toll-free number) from 6 a.m. to 11 p.m. (Eastern Time) Monday through Friday to obtain their EIN.

Recommended: Professional services have the EIN included in their LLC formation package. We recommend using –

LegalZoom – ($0 + State Fee for LLC formation)

Step 6: Opening of Illinois Business Bank Account

When converting your sole proprietorship to an LLC, separating your personal and business finances is essential by opening a dedicated business bank account. Illinois business bank account helps maintain limited liability protection and makes managing your business’s finances and taxes easier.

To open a business bank account in Illinois, you will need the following documentation:

  • Your LLC’s Certificate of Formation
  • Your LLC’s EIN
  • Your LLC’s operating agreement (if applicable)
  • A resolution authorizing the opening of the account (if required by the bank)

You can check out the Best Banks in Illinois, which offers the best fees, services, and convenience for your business needs.

Step 7: Register for Illinois Taxes and Licenses

As an LLC in Illinois, your business may be subject to various state taxes and licenses, depending on the nature of your operations. Common taxes and licenses include:

  • Sales Tax: If your LLC sells taxable goods or services, you must register for Illinois sales tax permit and collect sales tax from your customers.
  • Employer Taxes: If your LLC has employees, you may be required to register for Illinois unemployment insurance and workers’ compensation coverage.
  • Business License: Illinois Business License is a legal document granted by a state government body that permits you to conduct business within the area under its jurisdiction. The price of business licenses and permits in Illinois ranges from $50 – $300.

To ensure you comply with all applicable Illinois tax and licensing requirements, you can check out the Illinois Department of Revenue for more information.

Step 8: Inform Clients and Vendors of the Conversion

After converting your Illinois sole proprietorship to an LLC, you must inform your clients, vendors, and other business contacts of the change. Update your contracts, invoices, and marketing materials with your new LLC name, and communicate the transition to ensure a smooth and professional process.

Ongoing Compliance For Illinois LLCs

As an LLC in Illinois, you are subject to ongoing compliance and reporting requirements, including:

  • Filing Annual Report with the Illinois Secretary of State and pay the associated fee and which you can pay every 1 year (before the anniversary month starts).
  • Maintaining accurate and up-to-date records of your Illinois LLC’s finances, meetings, and decisions. You can manage your finances using spreadsheets, accounting software, or becoming a CPA in Illinois.
  • Adhering to any industry-specific licensing and regulatory requirements.

Benefits of Converting Illinois Sole Proprietorship to an LLC

In converting Illinois Sole Proprietorship, there are benefits that you should consider. Here are the benefits you must know before converting your sole proprietorship:

Limited Liability Protection

Converting a sole proprietorship to an LLC provides limited liability protection for the business owner. This means that the owner’s assets (such as their home or car) are separate from the business assets and are protected from being seized to pay off business debts or in case of a lawsuit.

Credibility and Professionalism

Illinois LLC can help improve the credibility and professionalism of the business. Many customers and suppliers prefer dealing with an LLC, which shows commitment and stability.

Tax Flexibility

With Illinois LLC, you can choose how your business will be taxed. It can be taxed as a sole proprietorship, a partnership, or a corporation. This allows you to choose the tax structure that best fits your business and may result in potential tax savings.

Easier Access to Funding

Illinois LLC may have an easier time obtaining funding from banks and investors than a sole proprietorship. Many lenders and investors prefer to work with an LLC, as it demonstrates a commitment to the business and provides legal protection.

Ownership and Management Flexibility

Illinois LLC allows you to have multiple owners (called members) and to divide ownership and management responsibilities among them. This can make growing your business easier or bring in new partners.

Enhanced Privacy

In some states, such as Illinois, an LLC can offer more privacy than a sole proprietorship. This is because the business owner’s personal information may not be as public as it would be with a sole proprietorship.

Easier Transfer of Ownership

With Illinois LLC, transferring business ownership to another person or entity is generally easier. This can be beneficial if you decide to sell your business, bring on new partners, or plan for succession.

Continuity of Existence

Unlike a sole proprietorship, which ceases to exist upon the death or incapacity of the owner, Illinois LLC can continue to operate even if the owner passes away or becomes incapacitated. This provides stability and continuity for the business and its employees.

Compliance with Illinois Requirements

Some states require certain types of businesses, such as those in the professional services industry, to operate as Illinois LLC or another corporate entity. Converting your sole proprietorship to an LLC in Illinois ensures that your business complies with these regulations and avoids potential legal issues.

Access to Additional Benefits

Illinois LLC may be eligible for additional benefits, such as state-specific tax incentives or credits, not available to sole proprietorships. These benefits can help reduce your tax burden and support the growth of your business.

In summary, converting a sole proprietorship to an LLC in Illinois can provide significant benefits, including limited liability protection, tax flexibility, increased credibility, and easier access to funding. It’s essential to carefully consider these advantages and consult with a legal or tax professional before deciding to convert your business structure.

FAQs

What are the advantages of converting my Illinois sole proprietorship to an LLC?
Limited liability protection, tax flexibility, and more formal business structure.
Can I convert my Illinois sole proprietorship to an LLC without changing the name of my business?
Yes, you can keep the same name if you choose.
Is Illinois the same as other states when it comes to converting a sole proprietorship to an LLC?
Some states have different rules and regulations, but the process is similar in most states.
If I convert my Illinois sole proprietorship to an LLC, do I need a new EIN?
Yes, you will need a new EIN for your LLC.
How much does it cost to convert a sole proprietorship to an LLC in Illinois?
The current filing fee for the articles of organization in Illinois is $150.
What documents do I need to file to convert my Illinois sole proprietorship to an LLC?
You will need to file articles of organization and may need to file an operating agreement.
How long does it take to convert a sole proprietorship to an LLC in Illinois?
The processing time varies, but it typically takes several weeks.
Do I need to publish a notice of conversion in an Illinois newspaper?
No, Illinois does not require a notice of conversion to be published.
Do I need to notify existing clients or customers of the conversion to an LLC in Illinois?
It is not required, but it can be helpful for transparency.
Can I continue to use my same business bank account if I convert to an LLC in Illinois?
You will need to open a new bank account in the name of your LLC.
Will I need to transfer any licenses or permits when I convert my Illinois sole proprietorship to an LLC?
You may need to make changes to your business licenses if they were filed under your name rather than the LLC name.
Can I change my Illinois sole proprietorship to an LLC if I have outstanding tax debts?
Yes, but you should consult with a tax professional as soon as possible.
Does the name of my LLC need to be different than the name of my sole proprietorship in Illinois?
No, it can be the same.
Who can be a member of an LLC in Illinois?
Anyone, including individuals, corporations, or other LLCs.
Is it necessary to have a registered agent for an LLC in Illinois?
Yes, every Illinois LLC is required to have a registered agent.
Is it possible to convert to an LLC in Illinois with just one member?
Yes, your LLC can be a single-member LLC.
What is the difference between a single-member LLC and a multi-member LLC in Illinois?
A single-member LLC is managed by the same person who owns the business, while a multi-member LLC has multiple owners who share management responsibilities.
Can a foreigner own an LLC in Illinois?
Yes, there are no citizenship or residency requirements to form an LLC in Illinois.
Will I need to file annual reports for my LLC in Illinois?
Yes, every Illinois LLC is required to file an annual report with the state.
How is an LLC taxed in Illinois?
An LLC can choose to be taxed as a pass-through entity or a corporation.
Can I convert a partnership to an LLC in Illinois?
Yes, the process is similar to converting a sole proprietorship to an LLC.
Will my business’s tax ID number change when I convert to an LLC in Illinois?
Yes, your business will receive a new tax ID number when it becomes an LLC.
Can a business that offers professional services convert to an LLC in Illinois?
Yes, but certain professions may face additional requirements for licensing and registration.
Do I need insurance for my LLC in Illinois?
It is recommended that you have insurance to protect your LLC from liability and lawsuits.
Can an LLC in Illinois be managed by its members or do I need to hire a manager?
Your LLC can be managed by its members if you choose.
What happens if I don’t follow the formalities of my LLC in Illinois?
The protection of limited liability may be lost, and you may face legal consequences.
Can I dissolve an LLC in Illinois after it has been created?
Yes, an LLC can be dissolved by filing articles of dissolution with the state.
How do I register my LLC with the Illinois Department of Revenue?
You can register online for a sales tax permit and other state taxes with the Department of Revenue.
What is a sole proprietorship?
It is a type of business structure where one person owns and operates the business.
Can I convert my sole proprietorship to an LLC in Illinois?
Yes, a sole proprietorship in Illinois can be converted to an LLC.
What’s the advantage of converting from a sole proprietorship to an LLC?
The main advantage is that personal assets are protected by liability and debts of the business in an LLC.
Can an LLC be owned by a single individual in Illinois?
Yes, a single individual can be the owner of an LLC in Illinois.
How do I convert my Illinois sole proprietorship to an LLC?
You need to file Articles of Organization with the Illinois Secretary of State, adopt an operating agreement and get an EIN number.
Do I have to get a new EIN number after converting my sole proprietorship to an LLC?
Yes, you must have a new EIN number when you convert a sole proprietorship to an LLC.
What tax implications come with converting a sole proprietorship to an LLC?
The conversion may result in new income, sales and other tax liabilities.
Can the conversion process be done online?
Yes, the conversion process can be done online in Illinois.
Will I need to renew any business licenses after converting to an LLC from sole proprietorship in Illinois?
Yes, you’ll likely need a new business license.
Does Health Insurance of an Illinois Sole Proprietorship take effect once its LLC formed?
The particulars of the insurance policies will largely determine when coverage begins upon formation of an LLC.
Will existing contracts of my sole proprietorship have to be terminated or nullified?
No, you may continue to operate pursuant to existing business contracts.
How will the income from my Illinois LLC be taxed?
You can decide to have your LLC taxed either as a corporation, partnership or an individual’s income tax return.
What is the cost for converting a sole proprietorship to an LLC in Illinois?
The filing fee with the Secretary of State in Illinois is currently $150.
Can my debts as a sole proprietor affect the LLC’s finances?
No, once you convert to an LLC, your liability will be limited to the assets of the LLC being vulnerable to your business liabilities.
Can a sole proprietorship business name be the same as my newly converted LLC?
Yes, you can continue to use the same business name of your sole proprietorship to your Ltd Liability Company in Illinois.
Can I pay myself a salary from the LLC?
Yes, you assume the role of a paid employee, paying a reasonable wage to yourself as a member of the LLC which should be duly documented.
Will my tax filings become more complicated once I’ve converted to an LLC?
The returns for all levels of LLCs businesses can be tricky if you do not have experience, so it is advised you consult tax advisors.
Will the Illinois LLC need a registered agent?
Yes, every business undergoing conversion will be required to list a registered agent with the Illinois Secretary of State.
What is a registered agent?
A person authorized to receive legal documents and other official correspondence on behalf of your LLC in Illinois.
Can I recover all of my expenses from my sole proprietorship through the LLC after converting to an LLC?
It is essential you receive the appropriate advice on recouping losses appropriately.
Are there fees to maintain an Illinois LLC each year?
Yes, there are annual filing fees paid to the Illinois Secretary of State for maintaining an LLC in the state.
Do I need a new business bank account upon converting to an LLC?
Yes, every Restricted Liability Company requires a separate bank account.
Can an LLC form of business get funding in Illinois just like a sole proprietorship?
Yes, LLC is established as an independent legal entity from its owners, and maintain bank statements for their taxes and regulatory charges.
Do amended articles of organization indicating your conversion (language change) need to be filed?
Yes, your screen combined must present amended articles indicating Language change.
Would filing an amended SS-4 requesting treatment and/or applying IRS by phone be accepted?
According to the IRS, these SWIFT processes types are distinct ways provisional possession of an EIN Number.
Will I have to close all Illinois sole proprietorship foreign certificates after settling the LLC startup?
Yes, an Illinois just sample of required filings since the potential paperwork is most differ greatly by knowledge and executive regulation.
I missed to register my sole proprietorship in Illinois, how easy is it that to change after new LLC startup?
It’s important you rectify any such oversight so learn about restarting a corporation or LLC fast.

Also Read

Conclusion

Converting your Illinois sole proprietorship to an LLC is a significant decision that can provide valuable benefits, such as limited liability protection, tax advantages, and enhanced credibility. Following the steps outlined in this guide and consulting with legal and financial professionals, you can successfully navigate the conversion process and position your business for future growth and success.

Leave a Comment