Converting Your Texas Sole Proprietorship to an LLC in 2024

by
Convert Texas Sole Proprietorship to LLC

As a small business owner in Texas, 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 Texas, which is more suitable for your needs. Converting your Texas 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 Texas Sole Proprietorship to an LLC, enabling you to make an informed decision for your business.

How to Convert your Texas 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 Texas 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 Texas Sole Proprietorship to an LLC

To convert Texas 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 Certificate of Formation, 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 Texas, 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 Texas.

In Texas, 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 120 days. You must file a name reservation application in the Texas 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 Texas DBA, you can file it in two methods, by mail, and in person. However, before filing a DBA, you should know that you need to renew your DBA for up to ten years, which costs varies by county.

You can check the availability of your desired business name by searching the Texas Comptroller of Public Accounts Taxable Entity Search‘s website.

Step 2: Appoint a Registered Agent

In Texas, 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 Texas LLC, such as service of process, Texas Annual Report, and state tax notifications. Your Registered Agent must have a physical address in Texas and be available during regular business hours. In Texas, 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 Texas Certificate of Formation

To officially form your Texas LLC, you must prepare and file Texas Certificate of Formation with the Texas Secretary of State. The Certificate of Formation is a legal document that outlines essential information about your  Texas 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 Texas, the filing fee for the Certificate of Formation is $300. You can submit the document online through the Texas 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, Texas Operating Agreement is a crucial document that outlines the structure, management, and financial arrangements of your Texas 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 Texas operating agreement can help prevent disputes and ensure a smooth operation of your LLC. It is advisable to work with Texas Business Attorney to draft an operating agreement that meets the specific needs of your business and complies with Texas laws.

Step 5: Obtain an Employer Identification Number (EIN)

An Employer Identification Number (EIN) in Texas, 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 Texas 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 Texas 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 Texas 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. Texas 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 Texas, 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 Texas, which offers the best fees, services, and convenience for your business needs.

Step 7: Register for Texas Taxes and Licenses

As an LLC in Texas, 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 Texas sales tax permit and collect sales tax from your customers.
  • Employer Taxes: If your LLC has employees, you may be required to register for Texas unemployment insurance and workers’ compensation coverage.
  • Business License: Texas 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 Texas ranges from $50 – $300.

To ensure you comply with all applicable Texas tax and licensing requirements, you can check out the Texas Comptroller of Public Accounts for more information.

Step 8: Inform Clients and Vendors of the Conversion

After converting your Texas 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 Texas LLCs

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

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

Benefits of Converting Texas Sole Proprietorship to an LLC

In converting Texas 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

Texas 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 Texas 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

Texas 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

Texas 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 Texas, 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 Texas 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, Texas 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 Texas Requirements

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

Access to Additional Benefits

Texas 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 Texas 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 is a sole proprietorship exactly in Texas?
A sole proprietorship in Texas is a business owned and operated by a single person.
How is a Texas sole proprietorship different from an LLC?
A Texas sole proprietorship is not a separate legal entity from its owner, while a limited liability company (LLC) is.
Why should a Texas sole proprietorship convert to an LLC?
A Texas sole proprietorship may want to convert to an LLC to take advantage of the liability protection it offers and lower tax rates.
Is it difficult to convert a Texas sole proprietorship to an LLC?
No, it is a fairly simple process that can be done online through the Texas Secretary of State’s website.
Do I need to hire an attorney to convert my Texas sole proprietorship to an LLC?
It is not required by law, but may be recommended to ensure the conversion is completed correctly.
What are the costs associated with converting my Texas sole proprietorship to an LLC?
The cost will vary, but you can expect to pay a filing fee with the Texas Secretary of State as well as legal fees if you choose to hire an attorney.
What are the benefits of converting my Texas sole proprietorship to an LLC?
Some benefits include limited liability protection and lower tax rates.
Will I need to get a new Texas state tax ID for my LLC?
Yes, you will need to apply for a new tax ID number for your LLC.
Do I need to notify my customers if I convert my Texas sole proprietorship to an LLC?
No, it is not necessary to notify customers of the conversion.
Can I change the name of my Texas sole proprietorship to something else when I convert to an LLC?
Yes, you can choose a new name for your LLC.
Can I keep using my Texas sole proprietorship’s name once I convert to an LLC?
It depends on whether the name is available for use. If it is not available, you will need to choose a new name for your LLC.
How do I register my Texas LLC with the state?
You can register your Texas LLC with the state by filing the necessary paperwork with the Texas Secretary of State’s office.
What is a Texas sales tax permit?
A Texas sales tax permit is required if you sell taxable goods or services in the state of Texas.
Do I need to get a new sales tax permit when I convert to an LLC in Texas?
No, you can use the same permit for your Texas LLC that you used for your sole proprietorship.
Will I need to get new licenses and permits for my Texas LLC?
It depends on your industry and specific business activities.
Will I need to get a new Texas commercial driver’s license (CDL) if I convert my sole proprietorship to an LLC?
No, you will not need to obtain a new CDL if the business vehicle is registered to the LLC with the state of Texas.
Can my Texas LLC be taxed as an S corporation?
Yes, your Texas LLC can elect to be taxed as an S corporation.
Will I need new insurance policies after converting my Texas sole proprietorship to an LLC?
It depends on your current coverage and business activities.
Do I need to file the same taxes for my Texas LLC as I did with my sole proprietorship?
It depends on your business structure and activities, but you may need to file additional or different taxes.
How long does it take to convert a Texas sole proprietorship to an LLC?
It can take a few weeks to a few months depending on how quickly the filing is processed and approved by the state.
Do I need to notify vendors, suppliers, and creditors when I convert to an LLC in Texas?
Yes, it is recommended that you notify vendors, suppliers, and creditors of the conversion.
What happens to my Texas sole proprietorship’s debts when I convert to an LLC?
The LLC becomes liable for any business debts going forward.
Will changing a Texas sole proprietorship to an LLC affect the business’s contracts and leases?
It depends on the specific terms of the contracts and leases, but you may need to consult with an attorney to modify the agreements.
How many members are required to form a Texas LLC?
Only one member is required to form a Texas LLC.
How do I choose a registered agent for my Texas LLC?
The registered agent is the point of contact between the LLC and the state of Texas, and can be an individual or a business entity.
Is a Texas LLC required to have an operating agreement?
No, but it is strongly recommended to have one to outline the business’s management and ownership structure.
Can foreign investors own a Texas LLC?
Yes, foreign investors can own a Texas LLC.
Is a Texas LLC required to hold annual meetings?
No, Texas LLCs are not required to hold annual meetings unless the operating agreement requires it.
Will there be any change to my credit reports after switching from a Texas sole proprietorship to an LLC?
Yes, there will be a new credit report for the Texas LLC under its name.
What is a sole proprietorship in Texas?
A sole proprietorship in Texas is an unincorporated business owned by a single person.
What is an LLC in Texas?
A limited liability company (LLC) is a type of business entity that provides its owners with personal liability protection.
Why should I convert my Texas sole proprietorship to an LLC?
Converting your Texas sole proprietorship to an LLC can limit your personal liability and potentially offer tax savings.
Can I change my Texas sole proprietorship to an LLC?
Yes, Texas allows for sole proprietorships to convert to an LLC.
What are the steps to convert a Texas sole proprietorship to an LLC?
The steps to convert a Texas sole proprietorship to an LLC involve creating and filing Articles of Conversion with the Texas Secretary of State.
Do I need to notify the state if I convert my Texas sole proprietorship to an LLC?
Yes, when you convert your Texas sole proprietorship to an LLC, you must file the appropriate paperwork with the Texas Secretary of State.
What information do I need to provide when filing Articles of Conversion in Texas?
When filing Articles of Conversion in Texas, you will need to provide basic information about your business as well as pay a filing fee.
How long does it take the Texas Secretary of State to process my LLC paperwork?
Processing times can vary, but typically it takes the Texas Secretary of State several weeks to process LLC paperwork.
Is there a fee to convert a Texas sole proprietorship to an LLC?
Yes, there is a fee to convert a Texas sole proprietorship to an LLC. The fee will vary depending on the type of business entity being formed.
Will I need to obtain a new EIN number for my LLC if I convert from a sole proprietorship in Texas?
Yes, you will need to obtain a new EIN number for your LLC if you convert from a sole proprietorship in Texas.
Do I need to file for a new business name if I convert from a Texas sole proprietorship to an LLC?
If you want to change your business name when you convert from a Texas sole proprietorship to an LLC, you will need to register the new name with the Texas Secretary of State.
What is personal liability protection with an LLC in Texas?
Personal liability protection is a feature of LLCs in Texas that shields owners’ personal assets from legal liability for the business’s debts or lawsuits.
Will converting my Texas sole proprietorship to an LLC protect me from lawsuits?
Converting your Texas sole proprietorship to an LLC can offer protection from certain types of lawsuits, but it is not a complete shield from all types of legal liability.
Can I be the only member of an LLC in Texas?
Yes, Texas allows for single-member LLCs.
Will converting to an LLC affect taxes in Texas?
Converting to an LLC in Texas may have tax implications, including the potential for tax savings.
Will I need to obtain any special licenses or permits if I convert to an LLC in Texas?
Depending on your industry and business activities, you may need to obtain special licenses or permits if you convert to an LLC in Texas.
How is income taxed for a Texas LLC?
Texas LLCs are not subject to state income tax but are required to pass through profits to individual owners, who are then taxed on their personal returns based on their percentage of ownership.
What is the difference between liability insurance and personal liability protection with an LLC in Texas?
Liability insurance protects a company from potential financial losses stemming from lawsuits or claims, while personal liability protection with an LLC shields the owner’s personal assets from certain types of legal liability.
Do I need liability insurance if I convert my Texas sole proprietorship to an LLC?
Even with personal liability protection as an LLC in Texas, it is still a good idea to obtain liability insurance.
Does forming an LLC in Texas protect my personal assets from business debts?
Yes, forming an LLC in Texas can help protect an owner’s personal assets from business debts or legal judgments.
What obligations do Texas LLC owners have to file taxes?
In Texas, LLC owners must pay federal income tax on their share of the LLC’s profits and report this information on their personal tax return.
Can I continue to operate my Texas business as a sole proprietorship once I have established an LLC?
In Texas, once you have established an LLC, you must operate the business as an LLC and cannot continue to operate as a sole proprietorship.
Can I be sued personally if I convert my Texas sole proprietorship to an LLC?
Converting your Texas sole proprietorship to an LLC provides some personal liability protection, but there is still the possibility of personal liability in certain situations.
Can I convert my Texas corporation to an LLC?
Yes, Texas corporations can convert to LLCs by filing Articles of Conversion with the state.
Can I convert my Texas LLC to a sole proprietorship?
It is not possible to convert an LLC to a sole proprietorship, as a sole proprietorship is defined specifically as a business owned by a single individual.
Will converting my Texas sole proprietorship to an LLC protect me from personal guarantees I have signed for business loans?
Converting your Texas sole proprietorship to an LLC does not automatically relieve you of personal guarantees you have signed for business loans.
Is forming an LLC in Texas expensive?
Forming an LLC in Texas is relatively inexpensive, with filing fees starting at just a few hundred dollars.
Can a foreign business owner convert their Texas sole proprietorship to a Texas LLC?
Yes, foreign business owners can convert their Texas sole proprietorship to a Texas LLC by following the standard conversion process.
What is the difference between registering as a foreign LLC in Texas and converting to a Texas LLC?
Registering as a foreign LLC in Texas applies to companies that are already established in another state and are looking to do business in Texas, while converting to a Texas LLC involves changing the type of business entity from a sole proprietorship to an LLC.

Also Read

Conclusion

Converting your Texas 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