Is your original business structure no longer a good fit for your company? Change it.
- The business structure for your company is one of the most important decisions you’ll ever make. However, you can change the structure at any time.
- Most owners review liability protections and tax advantages as part of choosing the right business structure.
- Common business structures include corporations, partnerships, sole proprietorships, cooperatives and limited liability companies.
Your company structure is the backbone of your organization. It dictates your management, accountability, and taxes and sets the rate to the entrepreneurial journey. On the other hand, the very first structure you select does not need to be more permanent.
“As your business evolves, you might realize your present structure no longer matches your requirements,” said Brittany Nevels, branding and business trainer and owner of BE Distinct Designs.
“A business that started out as a single proprietorship can incorporate a spouse, employ a team, or create goods or services in a capacity that needs more security. Similarly, a bigger company might discover they should downsize and might feel that an LLC might be a better match.”
If your initial plan is not working for you, then you may select a different one — if you are prepared to undergo the procedure. Here is the way to change your company structure.
Also read: What is a Corporation Business | Top Ways to do Corporate Business
1. Check your state regulations
Since different countries require different measures and paperwork, so you need to consult the secretary of state where your company is enrolled, stated Nevels.
“You may also need to make confident the shift in structure does not require any extra permit or insurances,” she added. “Which will also change based on the company type and location. Some counties will need extra documentation out of the state needs.”
Company lawyer and founding partner of The Law Offices of Samuel M. Bregman, stated you might have to alter your articles of incorporation and business bylaws, file a DBA (“doing business as”) together with your nation’s government, enroll for an Employer Identification Number, and also notify your lender of any recorded changes. Additionally, research if your new arrangement will have filing charges, fresh forms and paperwork demands.
“In most nations, a limited liability company [must ] make a concomitant LLC operating agreement, which spells out in detail the way the LLC shall be regulated, also… is registered with the nation,” said Bregman.
“The production of the working agreement frequently necessitates a great deal of work and may activate a few thousand additional dollars in legal fees.”
2. Ask yourself these questions
Depending on the product or service your company offers, Nevels advised asking yourself the following questions:
- Will you require insurance?
- Will vendors require additional liability insurance?
- Does your state have sales tax?
- Will you be required to tax your product or service?
- Will you pay quarterly or annual tax?
- What type of product or service will you provide?
- Will you interact directly with your clientele?
- Do you run a higher risk of being sued if something goes wrong?
- How much money do you have to invest in your initial startup?
3. Consider your options
Bregman said it is important that you understand all of your choices for your company’s legal structure.
“It is nearly impossible for a layperson to figure this out on their own,” he explained. “It is crucial to communicate and strategize with an experienced small business lawyer, and likely then with your accountant too.”
Types of business structures to consider
These Will Be the most Frequent business structures:
Sole proprietorship: One individual is accountable for the whole business’s debts and profits.
Limited liability company (LLC): organizers have fewer obligations while appreciating flexibility and tax advantages.
Businesses: The organization is another entity from its owners. There are lots of types: C corporations, S corporations, B companies, close businesses and nonprofit businesses.
Cooperative: This kind of business is possessed by the people it serves.
Sole proprietorships and LLCs would be the most well-known alternatives for smaller companies, stated Nevels, but they are not the only options. “Some operations might realize that a complete corporation will be beneficial for them. Businesses are taxed differently, therefore many organizations find they get a bigger tax break beneath this arrangement”
But, Nevels added, if your company provides an agency (such as event photography or planning ) and deals with all customers, an LLC may be best to defend you from being sued as a person.
“There are a few exceptions, but in broad terms, the LLC prevents the person from accepting your own personal assets,” she explained. “Rather, they sue the company solely… In LLCs and businesses, it’s very important that you maintain the company funds from your own personal funds.
Failing to do this runs the risk of piercing the corporate veil, and placing yourself and your company in danger.”
As stated by the Small Business Association, additional small business structures include institutions, nonprofit corporations, limited liability partnerships and close businesses.
- A union is formed when there is a common interest or activity in a shared group.
- A non-profit corporation is a legal entity that does not perform services in pursuit of profit. Instead, nonprofits should pursue a goal as part of their actions. Many are registered as charitable nonprofits.
- A limited liability partnership is established in a similar way to a partnership. The main difference is that one partner has no obligation for the negligent actions of the other partner.
- Close corporations follow the same setup as the B-core. However, close corporations have less stringent rules and can be governed by a group of shareholders without the need for a board of directors.