Reasons to Change your Business Legal Structure
Business needs can change over the course of its life. At the start, you might’ve liked keeping things simple. However, as your business grows and becomes more successful, you may need more from its structure and organization than just ease of management and familiarity.
It can be tough for a first-time business owner to elect the optimal business structure from day one. No one can truly anticipate how your specific business might change and evolve in the future, and just because one business structure worked well during in your first few years doesn’t mean a change won’t be necessary or better when your revenue and business grow.
There are a number of reasons to look at a change in your business structure. It could mean more success, increased liability protection, and less fees and bookkeeping requirements. If you’re contemplating changing your business structure, make certain that you understand all of the options and thoroughly weigh the advantages and disadvantages a switch. A prudent move before you change anything is to discuss this issue with an experienced and local business broker, who can give you a great deal of advice from experience working in California and specifically in the Sacramento area with all types and size of companies.
If you’re contemplating a move, you and your business advisor should first reexamine the pros and cons of your current business structure. Then balance the importance of these characteristics to your business. this includes things like personal liability, taxes, fees, investment capital, and the continuity of business operations.
Some Business Organization Change Scenarios
From Sole Proprietorship or Partnership to LLC or Corporation.
If you (and your partners) decide to change your business structure, the liability of your business will move from unlimited personal liability to limited. This takes a bit of paperwork, such as drafting articles of incorporation and bylaws. You can also expect to pay more in the way of fees and expenses.
From a LLC or Corporation to Sole Proprietorship or Partnership.
Changing from an LLC or corporation to a sole proprietorship or partnership can be more of a challenge. With a corporation, you’ll have to get all of your shareholders to agree and to liquidate the assets of your business. And if you’re changing from an LLC, your tax obligations will be the only thing really different if you file as a corporation. There will be some state requirement that you’ll need to take care of, like licensing. You’ll also need to tell the IRS of the change, as your filing requirements will also be different.
From a C Corporation to an S Corporation.
As a C Corporation, a business must pay taxes on its profits, but when the owner distributes those profits to herself or himself, that income also needs to be reported on an individual tax return. This “double taxation” can be costly for a small business owner that elects to take profits out of the business. A way to avoid this is by using the pass-through tax treatment of an S Corporation, which isn’t subject to federal income tax. The company shareholders pay the only income tax on their share of the profit.
Making this change is pretty easy to do, but it’s time-sensitive. The change is completed with the IRS, not the state, and only affects your taxes. If you’re not eligible for S Corporation status, and you still want to change from a C Corp., it’s a little more complex. The rules vary in each state, and you may need to first dissolve the C Corporation and then form a new LLC. Speak with an experienced business advisor first, and don’t stay with a business structure that isn’t working for your business any longer that possible.
Andrew Rogerson is happy to help you with this decision on the types of business organizations, and can assist in the purchase or sale of a business in the Sacramento area.
To get information about business structure changes and to learn more about business opportunities in and around Sac, please visit our websiteServices and choose from the drop down menu the information you’d like.
For more immediate help, please send an email to Andrew or call him at (916) 570-2674.
