There are many reasons to consider a business structure change. With a different business structure, would your business be more successful? Could your sole proprietorship or partnership use more liability protection? Do you want to avoid excessive fees and bookkeeping requirements for your LLC or corporation?
If your answer to any of these questions is “yes” you may want to reconsider your business structure. If you are considering a change to your business structure, be sure to understand all of your options and weigh the pros and cons of a switch.
- Assess your options
Your business structure determines the amount of regulatory paperwork you have to file, your personal liability for business decisions and how you are taxed on your business income. Sole proprietorships, partnerships, limited liability companies, and corporations are examples of popular business structures.
It is important have an understanding of each before you make the decision to change your current structure.
- Things to consider
Businesses typically change their legal structure because of a change in business need. That might mean a need for more or different business liability, growth in your business, etc.
Sole proprietorships and partnerships enjoy simple management and operations. LLCs and corporations enjoy limited liability to their personal assets.
If you are considering a switch, first reassess the pros and cons of your current business structure and weigh the importance of the following five characteristics to your business:
- Fees and forms
- Investment needs
- Operational continuity
- What to expect: changes in business operations
From Sole Proprietorship or Partnership to LLC or Corporation: If you (and your partner) make the decision to change your business structure, your business will change from unlimited personal liability to limited. Expect to file more paperwork, including your articles of incorporation and bylaws. Fees and expenses will also increase.
From a LLC or Corporation to Sole Proprietorship or Partnership: Changing from an LLC or corporation to a sole proprietorship or partnership is more difficult. If you own a corporation, you must first convince shareholders to get on board with the plan and liquidate your business assets.
As an LLC, you only will see changes in your tax obligations if you file as a corporation. You will need to adhere to specific state policies like licensing requirements and inform the IRS to the change, as your filing requirements will change.
- Next steps
- File a DBA with your government agency.
- Register with the IRS. You will most likely need to apply for a new Employer Identification Number (EIN).
- Register with local and state agencies.
- Reapply for Licenses. Some states require you to reapply for licenses when your business structure changes.
- Notify your bank and insurance company of the change. Your bank may require you to transfer assets. Also, make sure you inform everyone you do business with, including suppliers, customers and employees, if the change affects them in any way.
Mariama Bramble is a contributor to the SBA’s blog which can be found at www.sba.gov/blogs.