If you’re operating a business under a DBA (which means “doing business as,” and is often also referred to as a “trade name” or “fictitious name”), there may come a time where you decide “it’s time to be official! I want to operate as an LLC now.” There is one major reason to do this:
- Operating as a sole proprietor under a DBA exposes you to personal liability; you are personally responsible for any debts and liabilities in your business. Operating as an LLC puts s separation between you, personally, and the LLC, so that your personal assets (ie. your bank accounts, house, etc.) will be protected from the debts and liabilities of the LLC.
Transitioning from a DBA to an LLC is really similar to the process of just starting an LLC from scratch. Though, there are a few small differences. Read on to find out the steps to take to transition your business from DBA to LLC.
Form the LLC.
You would do this by filing the Article of Organization with the Secretary of State in whichever state you want to form the LLC in. **This is where it’s a little different for DBAs versus if you’re just starting an LLC from scratch: if you have your DBA registered with your state, you might need to dissolve or withdraw that registration before you file the Articles of Organization to create the LLC. The reason for this is many states’ systems have a way of matching names to know that if this entity name is identical to that one, and most states won’t allow two separate registrations for the same name. So you may need to withdraw the DBA registration prior to filing the Articles of Organization, depending on how your state does things.
Withdraw the DBA.
If you didn’t already do so in Step 1, Step 2 is to now withdraw or dissolve any existing DBA or trade name registrations. Since the LLC exists, there’s no need to maintain the DBA registration. **Some states permit a conversion from a DBA to an LLC. Colorado doesn’t allow this so I don’t know much about it, but if your state does allow it then you can skip this step and just convert the DBA to an LLC.
Apply for an EIN.
An EIN, “Employer Identification Number” is a tax id number; basically a social security number for your LLC. The IRS doesn’t typically require a single-member LLC have an EIN, but many banks are going to require an EIN to get a business bank account. So you might as well get one anyway.
Prepare the Operating Agreement.
Now that the LLC is formed with your state and you got the EIN from the IRS, the next step is to prepare your Operating Agreement. Not all states require an Operating Agreement (Colorado included). However, we have a lot of case history and legal precedent that tells us it’s a really good idea to have an Operating Agreement, especially in the case of a single-member LLC, even if it’s not required by the state. Click here to download a free sample Operating Agreement for a Colorado single-member LLC.
Open new accounts or change existing accounts.
Any existing accounts you have open, whether they’re bank accounts, vendor accounts, or any registrations with local or state government agencies, all of those accounts used to be with you, personally. But now we want those accounts to be with the LLC instead. So whether this means changing your business bank account so the LLC is the account holder or opening new accounts under the LLC, moving forward you’ll want to ensure that all accounts are of the LLC rather than you personally under the DBA.
Assign contracts (as much as possible).
You’ve most likely signed a contract or two as a sole proprietor while you’re doing business under your DBA. This could be agreements with service providers, contractors, or your customers. Previously, those contracts were between you personally and the other party. We now want them to be with the LLC and the other party. With any of the existing contracts that your sole proprietorship has, you can assign your interest in those contracts to the LLC if the contract permits assignment. Otherwise, if there’s a term in your contract that prevents you from assigning it, you will want any renewals or extensions to be with the LLC. Moving forward, make sure any new contracts are between the LLC and the other party rather than you personally.
Now that you are operating as an LLC, you want to make sure you’re doing everything you can to uphold that limited liability protection that the LLC gives. Learn more about protecting your personal liability and how to avoid piercing the corporate veil.