Legal Question in Business Law in California

Re: Sole Prop to LLC conversion

Putting a sole proprietorship business into an LLC is technically not a conversion under California law because a proprietorship is not a distinct entity, it is just you performing business functions. The conversion process occurs when the business was formerly operated as a partnership or limited partnership, etc. A conversion would also occur if a corporation were allowed to change directly into an LLC, but there is no provision in California law for this at present, so corporations desiring to become LLCs must go through a multi-step process.

Formation of an LLC can have tax consequences, and there are additional tax consequences of its operation. If you plan and operate carefully, the consequences can be favorable, but a full discussion of this is well beyond the scope of an answer on a bulletin board.

However, as a general rule, if an LLC elects to be taxed as a partnership (which most do), there is no gain or loss on the contribution of cash or property to an LLC by its founders. See Internal Revenue Code section 721(a). However, there are six exceptions, one of which is that a contribution of services may be taxable.

An LLC must be formed by following certain formalities including filing a Form LLC-1. You will need to prepare the articles of organization and an operating agreement.

California now allows one-member LLCs, so it it not necessary to add your wife as a member, but there may be good reasons for doing so.

If your business is in North Bay, please contact me for a quotation on handling your LLC startup.