What was broken
A logistics business had grown rapidly from a sole proprietorship into a regional enterprise with multiple warehouses and institutional clients. The owner began facing challenges in obtaining larger contracts, attracting investors, and limiting personal liability under the existing business structure.
What we did
CapEasy managed the complete transition from a sole proprietorship to a company, including incorporation, transfer of business assets, indirect-tax and other tax registrations, contractual documentation, and compliance planning. The conversion was executed while ensuring uninterrupted day-to-day operations.
Where it landed
The business transitioned seamlessly into a corporate structure without operational downtime. The new entity enhanced credibility with customers, improved access to institutional financing, and positioned the company for long-term expansion.
The cut-over date is a fact the IRS checks, not a bookkeeping choice
Pick a single date the sole proprietorship stops and the LLC or corporation starts, and let every downstream record inherit it — the bank account switch, the first invoice under the new name, the first payroll run if there is one. The IRS treats this as a real structural change, not a rebrand: its own guidance on employer identification numbers tells a sole proprietor to "get a new EIN if you incorporate," and the sole-proprietor EIN can carry over to a single-member LLC only for as long as that LLC stays a disregarded entity with no employees and no excise tax liability — the moment it elects corporate or S-corporation treatment, or hires anyone, a new EIN is required.
A single-member LLC defaults to disregarded-entity status, meaning its activity still lands on the owner’s personal return unless an affirmative election is filed. That election runs through Form 8832, and it is the same mechanism whether the target classification is a partnership, a corporation, or a return to disregarded status — read the form’s effective-date rules before assuming the cut-over date and the election date are the same day, because they frequently are not.
The opening balance sheet carries the old basis, not a fresh valuation
The single most common opening-balance-sheet error is booking contributed assets — vehicles, inventory, equipment — at what they are worth today instead of what the sole proprietor’s books already carried them at. When assets move from an individual into a corporation in exchange for stock, IRS Publication 542 lays out the general rule: the exchange is non-taxable if the transferors are in control of the corporation immediately afterward (broadly, at least 80% of the voting stock), the stock received takes the old adjusted basis of the property transferred, and the corporation itself carries that same basis forward. Booking the contribution at fair market value instead of carryover basis overstates the balance sheet and can create a taxable event nobody intended.
Publication 542 also imposes a paper trail, not just a number: both the corporation and the contributing owner are expected to attach a statement of the facts of the exchange to their returns for the year it happened. That statement is the artefact — what was contributed, its basis, the stock or membership interest received in exchange — and it is the first thing a CPA or a future acquirer’s counsel asks for when they see a "conversion" line in the entity history.
The discipline that survives scrutiny: build the opening balance sheet as a reconciliation, not a fresh start. Every asset and liability on day one of the new entity should trace back to a specific line on the proprietorship’s last set of books, with the contribution documented the way Publication 542 expects — not re-estimated because a clean slate felt tidier.
Owner draws end at the cut-over; the accounts that replace them need names
A sole proprietor takes draws — withdrawals against equity, never a deductible expense, never payroll. That stops at the cut-over date. What replaces it depends on the entity: an LLC taxed as a partnership or disregarded entity still uses member draws against equity, while a corporation — including an S corporation — pays its owner-operator through payroll if they are actively working in the business, with distributions handled separately from wages. Mixing the two after conversion, paying "draws" out of a corporate account the way the proprietorship always had, is the single fastest way to blur the liability separation the conversion was meant to create.
If the new entity intends an S-election, the clock is tighter than the conversion itself: Form 2553 must generally be filed no more than two months and fifteen days after the start of the tax year the election is meant to cover. For a business converting mid-year, that means the officer-payroll versus distribution question has to be settled before the books have a full quarter of history under the new entity — retrofitting it later means reclassifying transactions that already cleared.
What to take from it
- Set one cut-over date and let the EIN, the bank account and the books all switch on it — the IRS requires a new EIN for a sole proprietor who incorporates, and reuses the old one only for a disregarded-entity single-member LLC with no employees.
- An entity classification election (Form 8832) is a separate action from incorporating; check its effective-date window rather than assuming it lines up with the cut-over date.
- Contributed assets go on the opening balance sheet at their old adjusted basis, not current market value — Publication 542’s carryover-basis rule, not a fresh appraisal.
- The contribution needs a documented statement of facts attached to the return for that year, not just a journal entry moving the assets onto the new books.
- Owner draws stop at the cut-over; if the new entity is a corporation, settle payroll versus distributions before the S-election deadline (2 months and 15 days into the tax year) rather than after.