Transferring Assets from Sole Proprietorship to an LLC

Making the change, I see? So, you're switching from a sole proprietorship to an LLC? But you've got a puzzled look on your face. That's understandable.

You're not alone when you wonder how to easily transfer your assets from your sole proprietorship to a limited liability company.

First, keep in mind that an LLC is a separate legal entity. This means that the title to any assets must be changed to reflect the new company's name from yours. Of course, how you actually do this depends on the assets involved.

Let's say for example, that as a sole proprietorship you used your computer for your online business. Now that you're filing as an LLC, you need to "sell" the computer to the LLC. All you need for this is a simple bill of sale in order to transfer ownership. In that case, the LLC would need to write a check made out to you for the purchase of the asset.

In this case, you need to pay attention to taxes. You sell the computer - which you paid $1,500 for - for $750. When this particular asset is depreciated, the basis is adjusted by the amount of depreciation taken. If you've taken all the depreciation you can, your basis is zero. And you have a taxable gain of $750 from the sale of this specific piece of equipment.

Another route to take with this example is if the sole proprietor (you) made a capital contribution of the computer to the new firm. If you choose this method, it's not only tax free, but it requires very little paperwork. You merely adjust an entry in the financial books of the LLC. Some financial experts also suggest that you add a memo or even a resolution to the company file that the transaction has been agreed upon by both the sole proprietor (again, that's you!) - and the LLC.

The LLC then uses what's called a "carryover" basis for the computer. The LLC utilizes the same rate of depreciation for the equipment that you have. Since you've already written off the entire cost of the equipment, then the carryover basis is zero. If, you bought this computer for $1500 and you've already taken a depreciation of $500, the LLC's carryover is then $1,000. The LLC then reports this on the owner's Schedule C. And ultimately for tax purposes nothing has really changed.

If on the other hand, you need to transfer your car from your name to that of the LLC, then you need to change the title with your state. The car's title would no longer be in your name, but that of the limited liability company. Or, as with the computer, you may just wish to contribute it to the new firm as capital. (Don't forget that transferring the car will require an update of the car insurance as well.)

The problem you may run into with the transfer of the car is if you're currently still paying for it. In that case, you really don't have the title to transfer. And you may not be able to do this without actually paying off the loan. In fact, many lending companies have built into their loans what's known as a "due on transfer" clause. This allows the lender to "accelerate" the payment of the loan if the title is transferred. This means that if you transfer the car from your personal name to that of the new business, you may have to pay for it in full!

Got some real estate that needs to be transferred as well? You may well discover the above issue to be also true with any real estate you're currently paying on and wishing to transfer. Of course, some lenders - especially in cases like this – may make exceptions. You'll need to check with the company that holds the title. But before you actually transfer any property, get the waiver in writing.

Before you make any of these changes, it's best to speak with a CPA who is qualified to counsel you through procedures such as this. Be sure to weigh the pros and cons of all possible choices, and go with the one that suits you best