Your business structure is the backbone of your company. It dictates your control, liability and taxes, and sets the pace for your entrepreneurial journey. However, the first structure you choose doesn't have to be permanent.
"As your business matures, you may find that your current structure no longer fits your needs," said Brittany Nevels, business and branding coach and owner of BE Different Designs. "A company that started out as a sole proprietorship may add a partner, hire a staff, or produce products or services in a capacity that requires more protection. Likewise, a larger corporation may find that they need to downsize and may feel that an LLC may be a better fit."
If your original plan isn't working for you, you can choose a different one – so long as you are willing to endure the process. Here's how to change your business structure.
Check with state regulations
Because different states require different steps and paperwork, you should check with the Secretary of State where your business is registered, said Nevels.
"You will also want to be sure that the change in structure doesn’t need any additional license or insurances," she added. "That will also vary depending on the business type and location. Some counties will require additional documentation outside of what the state requires."
Shlomo Zalman Bregman, Esq., business attorney and founder of The Law Offices of Samuel M. Bregman, said you may need to modify your articles of incorporation and company by-laws, file a DBA ("doing business as") with your state's government, register for an EIN (employer identification number), and notify your bank of any documented changes. Also, research whether your new structure will have filing fees, new forms and paperwork requirements.
"In many states, a Limited Liability Company (LLC) [is required to] create a concomitant LLC Operating Agreement, which spells out in detail how the LLC shall be governed, and … is filed with the state," said Bregman. "The creation of the Operating Agreement often necessitates a lot of work and could trigger several thousand additional dollars in legal fees."
You want to understand the details of each option before moving forward to avoid any potential issues with liability, taxes and more.
Ask yourself these questions
Depending on the product or service your company offers, Nevers 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?
Consider your options
Bregman notes that it's important for a business owner to know all their options for legal structure.
"It's almost impossible for a layperson to figure this out on their own," he said. "It's vital to communicate and strategize with a seasoned business attorney, and probably afterward with your accountant as well."
The most common business structures are:
- Sole proprietorship. One person is responsible for the entire company's profits and debts.
- Partnership. Two or more people share ownership of the company.
- Limited liability company (LLC). Owners have limited liabilities while enjoying flexibility and tax benefits.
- Corporations. The business is a separate entity from its owners. There are several kinds: C corporations, S corporations, B corporations, close corporations, and nonprofit corporations
- Cooperatives. Owned by the people it serves.
Sole Proprietorship and Limited Liability Corporation (LLC) are two of the most popular options for small businesses, said Nevels, but they're not the only choices.
"Some operations may find that a full corporation will be more beneficial for them," she added. "Corporations are taxed differently so many organizations find they get a larger tax break under this structure."
However, Nevels added, if your business provides a service like event planning or photography and deals with clients, an LLC might be best in protecting you from being sued as an individual.
"There are some exceptions, but in broad terms the LLC prevents the individual from taking your personal assets," she said. "Instead they sue the business solely … In LLCs and corporations, it is imperative that you keep the business funds away from your personal funds. Failing to do so runs the risk of piercing the corporate veil, and putting yourself and your business at risk."
For more on choosing the best business structure for your business, visit this article on our sister site, Business News Daily.