Changing your business from Sole Proprietorship to Corporation
Recently I decided to make a big change in my business, and decided it was time to become a corporation rather than continue operating under a sole proprietorship. I assumed this would be no simple task, but even my wildest expecations were surpassed with what this process takes. I wanted to share a cliffs notes version as well as provide a checklist for anyone out there looking to do the same. Please note: I worked with a CPA during this process and recommend doing the same. I am not a CPA, nor tax attorney, so this list may be incomplete depending on your business and should be used as a general guideline.
What we need to do:
File for a new EIN- This part is super easy and can be done at the IRS website here.
File for articles of Incorporation- I went through mycorporation.com and was very happy. Saved me lots of time and money as they were very quick and much cheaper than hiring an attorney.
Create a new set of accounting books (quickbooks or whatever you are using, you need a new file for the corporation).
Open a new corporate bank account and transfer any funds needed to operate the business into this.
When filing for the corporation status you will determine stocks and share pricing, that amount must get put in the bank at minimum. If you need more operating funds you can transfer money in as a loan from your old account. You’ll enter it on the books as a loan (speak to your CPA on how to do this), and then pay the business back once you can, or don’t, doesn’t matter.
If you use a business credit card, open a new card as well.
Apply for EDD to change your Payroll status (in CA they will let you use the same number but they have to process the change with your new EIN from the IRS).
Apply for a new Business License
Apply for a new sellers permit or any other permits
Update your business information with any business liability and workers compensation insurance.
Notify your Merchant Processing and reapply with them with your new business information.
Update all auto pay for any personal and business purchases to separate your money.
Set up payroll with new information, and add yourself to payroll
If applying for S-CORP, submit the application to the IRS for S-CORP.
Make sure you file the 2553 and receive an acceptance letter from the IRS confirming the S-Corp status being approved.
About Form 2553, Election by a Small Business Corporation | Internal Revenue Service (irs.gov)
I had an extremely tough time with this. I highly recommend mailing in the form vs faxing. You’d think it would get there faster and done faster, but the IRS seems to handle physical paper better than a fax.
If you do not have a response or get stuck, here is some contact info that can help.
IRS Tax Payer Advocate: 1-877-777-4778
IRS Business: 800-829-4933