"Converting" from a Sole Proprietorship is unlike Statutory Conversion provided in many states for some Partnerships, an LLC, or any type of corporation. The initial process takes two steps: Create the LLC or other business entity type, then transfer the assets into that new entity. Further considerations may include, without limit, the following:
Create an Operating Agreement - Manage co-members, roles, risks, dissolution, etc.
Elect Appropriate Tax Treatment - At least four basic options exist, and forms may be required
Establish an LLC Bank Account - Use new EIN, if any, and do not commingle with personal assets
Transition Existing Contracts - Assign rights to the LLC and notify clients, or patiently re-negotiate
Assignment. Here we briefly explore this last item. Assigning a contract to your new LLC may generally be done if a contract does not otherwise restrict such action within its aptly named "Assignments Clause" or elsewhere by similar language. The act of assignment is typically performed by a single-page agreement, transferring all rights and responsibilities from you, as Sole Proprietor, to the new LLC.
Procedure. An LLC then attaches the assignment to a copy of the original contract, files it appropriately, and notifies the client. If you have good relationships, clients likely already know of the LLC's formation, so this formal notice is no surprise and possibly even welcomed as a sign of coming growth.
Prohibition. If an existing contract effectively prohibits this assignment, then you could consider negotiating a contract codification according to the terms or for some new consideration. If you and counsel cannot find a way to secure an assignment, then patience might be prescribed. Allow the current contract to expire, and negotiate the next renewal between Client and LLC.
Additional Publication. Some states require general notice in a newspaper. So, we would want to know the state of your Sole Proprietorship and LLC, determine whether the nature and extent of business in another jurisdiction would require additional registration there as a Foreign LLC, and whether that foreign jurisdiction would require publication.
So, this shift takes multiple steps, each with special attention. Contractual assignments concern a concept akin to collateral. The agreement was formed with the expectation that specified parties could be liable in case of a breach. Shifting to an LLC effectively shields some assets from the reach of a court-ordered remedy. Hence, the need for a careful review of each contract and context....
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