Switching from Sole Proprietorship to LLC

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Switching from Sole Proprietorship to LLC

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tbaz01

posts: 2

Aug 07, 2009 1:34 PM ET Quote Report Abuse

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For the last 5 years, I`ve been a sole proprietor. It`s very simple and I don`t have to separate my personal and business accounts. I`m going to be buying a house with my girlfriend, and I don`t want her to be liable for my business debts. I would like to know all the steps I need to do to change my business to an LLC.

I currently have about $15,000 in business debts. I`m hoping that if we buy the house after I switch to an LLC that our house won`t be affected if I have to file for bankruptcy. I understand that my other assets that I`ve owned before I became an LLC would probably be in jeopardy. Am I wrong about this???

avirtualreality

posts: 9

Aug 12, 2009 9:41 AM ET Quote Report Abuse

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It`s my understanding from my accountant, that ANYTHING you own while under SP is at risk.
I`m supposed to get with her within the next few months and change over to an LLC or S-Corp so my home/family won`t be at risk. She made it sound like once you do that...you are fine. Now whether or not you get sued over something that happened prior to changing over? It could possibly still place you in jeopardy but check with your accountant to make sure.
Good Luck!

tbaz01

posts: 2

Aug 12, 2009 11:53 AM ET Quote Report Abuse

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Thanks,

Thats what I thought also.

avirtualreality

posts: 9

Aug 12, 2009 1:25 PM ET Quote Report Abuse

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You are most welcome. I`m happy to help. If you need a good accountant who knows the ins and outs of transferring over, I have the perfect one for you...
Here is her linkedin info:

http://www.linkedin.com/pub/patricia-carawan/7/911/876

baloga

posts: 67

Aug 12, 2009 1:48 PM ET Quote Report Abuse

Points: 1 Vote

In terms of your existing business debts, a lender is not going to allow the transfer of the liability over to a new entity unless you`ve already given a personal guarantee.

Once you do form the new entity, make sure you follow all of the corporate formalities - separate bank accounts, accurate corporate records, etc. What you don`t want to happen in a lawsuit is for a plaintiff to "pierce the corporate veil." For example, you create a new entity, transfer your assets to the new entity then file personal bankruptcy. A court might hold that the transfer was not legitimate.

The rules for "piercing the corporate veil" vary by state. In certain states, e.g. California, it is much easier.Make sure that when you do set up the new entity, you are doing so for valid reasons.

Ed Baloga, CPA / MBA
Principal CFO
Baloga Associates
ebaloga@baloga-associates.com
www.twitter.com/edbaloga

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