Businesses evolve over time, and so do their needs and risks. As your business grows, keeping it up-to-date with what you need, including the choice of business structure, is essential. When you first open your company, it is common to start with a sole proprietorship or simple partnership structure, but that might not cut it down the road. Thankfully, you can do something about it.
Yes! You Can Change Your Business Structure!
You can, in fact, change your business structure. It is actually more common than you might think. While you might start out as a sole proprietorship, you will likely grow out of that as you take on new investors or owners. Your business structure is not set in stone, allowing you to operate better and strengthen your business as it evolves. Every business owner’s reason for shifting structures can be different, but there are a few reasons to keep in mind so you don’t fall behind.
Reasons You Might Change Your Business Structure
Protection From Liability: As your business grows, so do the risks that come with it. As you take on more employees, apply for loans, or increase your number of customers, your business will come in contact with possible liabilities. A more formal business structure could be in order to help protect your company.
Improve Your Tax Burden: Different structures will come with their own tax benefits. As your business grows, you are going to increase your profit, and it could be time for a change to ensure you are setting your business up for success during tax season.
Bring On Investors: If it is time to bring on investors, you want to ensure you are protecting your business from any and all risks that come with it. Switching over to a corporation or LLC allows you to implement clear rights and responsibilities that owners and investors must abide by. Additionally, having a more formal structure will attract investors.
Finance Through a Bank: If you are seeking out a loan at any point, you might find that many banks will decline loans to sole proprietors or partnership businesses as these structures might show your business as new or risky. If you are at the point in your growth where a structure change makes sense, you will also increase your chances of getting a loan from a bank.
How to Make the Change
Just like you registered with your state to get your original business structure in place, you will do it again to change over to your new structure. However, each structure includes its own set of necessary documents, so whether you choose an LLC or a corporation, you must acquire the correct documentation to send to the state.
If you choose to structure as an LLC, you need additional rulings, such as a formal operating agreement or partnership agreement. These agreements set up owners, partners, and investors’ ownership, rights, and obligations. A corporation also has its own set of rules. To operate as a corporation, you will need to implement titles such as president, secretary, and board of directors, as well as create a stakeholder agreement.
Much goes into changing business structures, and to ensure you are going about it correctly and legally, it is wise to connect with a business attorney who can walk you through the process. If you are at this point or thinking about it, contact the team at Hartmann Law.