The foundation of your company is your business structure. It’s probably one of the first things you focused on when you built your business and has influenced many of your business choices since.
- Your business structure can be modified at any given point.
- A structural change requires careful thought, preparation and consultation by experts and colleagues.
- Be mindful of all the consequences of switching and don’t switch until finalizing your decision.
Your business structure (LLC, S-Corp, C-Corp, etc.) determines the level of influence you have over your company, the taxes you pay and the day-to-day running of your business. When you’re in the early stages of starting your company, it can seem like a lifetime decision to choose a business structure, despite everything that it decides. As with life, however, things change. Industries are rising and diminishing, you may want to mitigate your tax liabilities or you may even want to reduce your potential liability exposure. Changing your business structure can be made to better suit your changing business needs.
Types of Business Structure
To change the structure of your business, first you need to know the form of company to which you are changing.
There are four main options for the business structure:
- Sole proprietorship
- Limited Liability Company
1. Sole Proprietorship
According to the US, many small businesses begin as a sole proprietorship, which is the easiest and most popular way of starting a company. Small Business Partnership. A sole proprietorship is an unincorporated company owned and operated by one person who is entitled to all income and responsible for all corporate debts, losses, and obligations.
Another arrangement is a partnership which can be as straightforward or as complicated as business owners do. You may have an oral “handshake deal” or a formal partnership agreement detailing the relationship structure, mutual goals, liabilities, and so on. A business partnership can have two or three business partners; however, more joint decision taking partners can mean more complications.
A limited liability company (LLC) enables you to take advantage of both a corporation’s and a partnership’s advantages. In most cases, LLCs offer greater protection from personal liability by sheltering your personal assets, such as your vehicle, house, or savings accounts, if your LLC fails or litigates. However, gains and losses flow through to your personal income without having to face corporate taxes, but members of LLC are deemed self-employed and have to pay taxes on self-employment.
A company is a firm or group of persons permitted to function and legally recognized as a single entity independent from its shareholders. Companies come in two kinds: C-Corps and S-Corps. C companies are subject to double taxation, where the company is taxed before and after the dividends are distributed. S companies are the most common small business form largely due to the exemption from double taxation. Corporations often provide the greatest degree of personal liability protection but are costly to create and require extensive record-keeping.
When do you change your business structure?
Taxes, whether saving or simplifying tax filing, or increasing the legal protections as a business owner are a growing incentive for changing the business structure. Most businesses often adjust their structure as they experience substantial changes, such as recruiting or attracting outside funding or financing.
Another reason for structural change, particularly for sole proprietors, is greater integrity of the business. If it has a solid, versatile legal structure, many clients may take a business more seriously.
If you are wondering whether a change is needed, sit down and evaluate the reasons for wanting the change, how it helps the company, possible risks to making the change, and what you (and the business) need to do to make it happen.
How do you change your business structure?
The first thing you should do is consult with your state secretary and a tax advisor on company regulations to see what measures and paperwork are required. Make sure you know, if any, what new licenses, insurance or registration the new structure would need. You can be driven through this method by your tax advisors.
Then, tell all your staff–if any–what will be the change, how it will be enforced and what will be the short-and long-term consequences.
What should you not do?
There’s a lot to be conscious of when changing the structure of your company. And because it’s your own business, you have a strong personal interest in ensuring you stay away from legal and/or financial difficulties. As such, don’t alter your own company structure. Consult with experts outside your business, as well as partners and/or staff