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Sole Proprietorship To Llc

Corporate Law Discussions

Sole Proprietorship To Llc

Postby VanAken » Tue Dec 06, 2016 12:03 am

Hi David,

My wife owns a Nail Salon in Carroll county, Maryland.  She is sole owner and now she  change it to a Single Member LLC.  She has done everything, got a new EIN, new Bank Account,new  Merchant Account...untill the last step is updating her Salon License with the State Board.  She fill out the form but the State Board also require a Use and Occupancy Permit or a Written Authorization. She went to the Zoning Office to get the Permit.  Here, she was told that she have to apply for that Permit, pay the Fee, wait for the Inspector come to inspect the Shop and if everything OK they will issue the Use and Occupancy Permit.  Is that suppose to be that way to update a Salon License in Maryland.(I mean that you have to get a Use and Occupancy Permit, have Inspectors come to your shop inspects all the plumping, electrical!!!).  This doesn't make  sense to me at all.  Now we stuck, please, your advices will greatly be appreciated.

Ty

ANSWER: Ty,

Unfortunately you discovered one of the most over-looked pitfalls in transferring assets of a sole proprietorship to a single member LLC.  While the single member LLC is ignored for Federal tax purposes, it is a new entity for state law purposes.  Many permits and licenses are non-transferable(as are some contracts, like many franchise agreements).  So even though it seems like a simple matter to convert a sole proprietorship to an LLC, the permits and licenses can trip you up.

I don't know for certain whether the information that your wife got is correct, but I suspect that it is.

If it is, you may not be stuck.  Since a transfer to or from a single member LLC is ignored for tax purposes, I would suggest that your wife transfer everything back to herself until the Salon License is issued to the LLC.  Don't terminate the LLC or close its bank account or merchant account.  Just let them sit idle while your wife runs the salon under her sole proprietorship.  As soon as the Use and Occupancy Permit is issued and the Salon License granted, she can start using the LLC.

Good luck.

---------- FOLLOW-UP ----------

Hi David,

Thanks for your quick reply, I really appreciate it.  I've got another question.  Since she has already used the new Bank and Merchant Account, so is there any Tax problem if she just use her old Salon License.  Thanks in advance for your advices.

Ty
VanAken
 
Posts: 44
Joined: Sat Feb 15, 2014 2:44 pm

Sole Proprietorship To Llc

Postby Broin » Thu Dec 08, 2016 1:35 pm

Hi David,

My wife owns a Nail Salon in Carroll county, Maryland.  She is sole owner and now she  change it to a Single Member LLC.  She has done everything, got a new EIN, new Bank Account,new  Merchant Account...untill the last step is updating her Salon License with the State Board.  She fill out the form but the State Board also require a Use and Occupancy Permit or a Written Authorization. She went to the Zoning Office to get the Permit.  Here, she was told that she have to apply for that Permit, pay the Fee, wait for the Inspector come to inspect the Shop and if everything OK they will issue the Use and Occupancy Permit.  Is that suppose to be that way to update a Salon License in Maryland.(I mean that you have to get a Use and Occupancy Permit, have Inspectors come to your shop inspects all the plumping, electrical!!!).  This doesn't make  sense to me at all.  Now we stuck, please, your advices will greatly be appreciated.

Ty

ANSWER: Ty,

Unfortunately you discovered one of the most over-looked pitfalls in transferring assets of a sole proprietorship to a single member LLC.  While the single member LLC is ignored for Federal tax purposes, it is a new entity for state law purposes.  Many permits and licenses are non-transferable(as are some contracts, like many franchise agreements).  So even though it seems like a simple matter to convert a sole proprietorship to an LLC, the permits and licenses can trip you up.

I don't know for certain whether the information that your wife got is correct, but I suspect that it is.

If it is, you may not be stuck.  Since a transfer to or from a single member LLC is ignored for tax purposes, I would suggest that your wife transfer everything back to herself until the Salon License is issued to the LLC.  Don't terminate the LLC or close its bank account or merchant account.  Just let them sit idle while your wife runs the salon under her sole proprietorship.  As soon as the Use and Occupancy Permit is issued and the Salon License granted, she can start using the LLC.

Good luck.

---------- FOLLOW-UP ----------

Hi David,

Thanks for your quick reply, I really appreciate it.  I've got another question.  Since she has already used the new Bank and Merchant Account, so is there any Tax problem if she just use her old Salon License.  Thanks in advance for your advices.

Ty
Broin
 
Posts: 49
Joined: Fri Jan 17, 2014 1:43 pm

Sole Proprietorship To Llc

Postby arthwr61 » Mon Dec 12, 2016 9:51 pm

From a federal tax standpoint it makes no difference.  As far as the IRS is concerned, the single member LLC and the sole proprietorship are one and the same. I would caution you that using the old salon license with the new bank account and merchants account could potentially create an issue if there is ever an attempt to pierce the corporate veil of the LLC.  You need to maintain the LLC and the sole proprietorship as separate and distinct entities.  Commingling any assets can be a factor in setting aside the protection of limited liability.  Although the cases typically require more than a occasional slip-up, the fewer factors that a plaintiff can point out, the better.  For reference, I have identified some of the key factors at http://www.illinoisbusinessattorney.com/articles/piercing_veil.html
arthwr61
 
Posts: 39
Joined: Mon Jun 17, 2013 4:00 pm


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