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Switching from Sole Proprietorship to LLC

    • 33 posts
    August 12, 2009 8:48 AM EDT
    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

    • 2 posts
    August 7, 2009 8:34 AM EDT
    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???
    • 2 posts
    August 12, 2009 6:53 AM EDT
    Thanks,

    Thats what I thought also.