when a sole proprietor seeks to incorporate a business the owner usually restructures it into an llc for this to work the owner must first determine that the company name is available if the desired name is free articles of organization must be filed with the state office where the business will be based the business owner must create an llc operating agreement defining the business structure finally the new company must obtain an ein from the irs 
sabrina jiang investopedia 2020advantages and disadvantagesa sole proprietorship requires a limited amount of paperwork to get started the tax process is simpler because an employer identification number ein from the internal revenue service irs is not required and owners can use their social security number ssn to pay taxes income generated from a pass through business is only subject to a single layer of income tax and in some cases may be eligible for a 20 tax deduction until 2026 an important downside of a sole proprietorship is that it provides no liability protection to the owner by contrast an llc separates business and personal assets and the owner is protected against creditors seizing their assets such as their home this unlimited liability goes beyond the business entity to the owners themselves sole proprietorships must rely on standard funding like bank loans or lines of credit banks may view a new business with a small balance sheet as a high risk borrower no need to obtain an ein from the irsquick and easy setup compared with other business structurespass through tax advantagepersonal assets are not separated from business assetsdifficulty in raising capitalowners assume all debt and tax liabilitythe tax cuts and jobs act tcja of 2017 added a tax break for pass through entities that essentially allows them to deduct up to 20 of qualified business income that deduction can result in huge savings and runs until jan 1 2026 unless extended by congress taxationthe owner of a sole proprietorship pays personal income tax on profits earned from the business sole proprietors report their income and expenses on their tax returns and pay income and self employment taxes on profits tax forms include 