Deciding to form an LLC is usually a good idea when you are first starting a business. But even if you are already operating a successful business, forming an LLC or making other changes to your corporate structure can be helpful during times of expansion as well. As your business grows, your business needs will often change.
If your business is succeeding and expanding, this is a good opportunity to re-evaluate your choice of business entity. There are several reasons why you might want to reconsider your choice or create a new business entity to serve the changing needs of your growing business.
1. You’re Ready to “Make it Official”
Many new small business owners might feel reluctant at first to form an LLC because they’re not sure if their business is really “legit” or “big enough" to be worth setting up a business entity at all. For example, if you’re running a small business out of your home or providing professional services under your own name while still keeping a regular full-time job, you might feel like it’s good enough to just do business as a sole proprietor.
However, even if you're not yet making much profit from your home-based business or professional consulting work, you should protect yourself from personal liability by forming an LLC. Even if your business doesn’t make much money in your first year, you can still benefit from the personal liability protections that an LLC offers instead of just hanging out a shingle under your own name. Also, once your business starts to make money, forming an LLC can often give you some tax advantages (especially if you file as an S Corporation) compared to just reporting that “business” income on your personal tax return.
Even if you've already been doing business as a sole proprietor, you might discover that growth and success bring new challenges. The same small business that was able to run successfully as a sole proprietorship might encounter additional complexities that develop over time, which can make an LLC a better fit. For example, many small business owners who run home-based businesses might feel like they don’t want to bother setting up a corporate entity during the early days of their business. They might prefer to test their business model first to see how much money they can actually make, and then form an LLC later once they are confident that they have a viable business.
2. You Are Ready to Hire Employees
Many small businesses are single member LLCs. This is a great feature of the LLC structure because it enables solo professionals or small home-based businesses to get the full legal liability protection of an LLC (even if they don't have any employees yet). However, if you are ready to start hiring employees, your sole proprietorship might not be good enough to deal with the complexity of complying with employment laws and regulations. Instead, you might want to form an LLC or even a C Corporation, which can issue stock to your employees as part of their compensation. Hiring employees is a major step in your business’s growth, and you need to make sure that the business entity you choose is adequate to deal with that growth.
3. You Want to Take on Business Partners
If your business was a sole proprietorship or LLC during the early stages of growth when you were just a single person running the company, you might want to reconsider your choice of business entity if you decide to work with business partners. Many business owners decide to share their resources and ideas with other business partners as their companies get bigger — merging your business with another person's expertise is a good way to grow your influence and your revenue potential. But if you have decided to take on business partners, you might want to set up an S Corporation, which can have up to 100 shareholders (as long as these shareholders are all U.S. citizens or legal residents of the United States).
4. You Want to Achieve Massive Growth
If you are running a fast-growing company, sticking with an LLC might not be the right choice. If you have big ambitions for your company, want to hire hundreds of employees, envision becoming publicly traded and plan to achieve significant business valuation, you might want to set up a C Corporation. The C Corporation is often the best entity choice for small businesses that want to get bigger. This is due to its structure being most appealing to investors, its lack of limitations on ownership (you can have U.S. or international shareholders in your C Corporation) and its ease in issuing shares of stock. If you dream of holding an IPO (Initial Public Offering) and seeing your company name on Wall Street, you should set up your growing business as a C Corporation.
As your business expands, you'll no doubt encounter new challenges and exciting opportunities. Business owners are constantly having to evolve along with the changing circumstances of their business, which is one of the most fun and educational aspects of running a company. But as your business grows, don’t feel like you have to stick to the same business entity that you started with. You might realize that you need to change your business structure in order to manage new risks or capitalize on new growth potential.
Whether you need to form an LLC, set up an S Corporation, form a C Corporation, or otherwise alter your business operations, don’t hesitate to make a change that will benefit your business and keep your company thriving for years to come. Incfile can help you make all these changes to both start your company and manage its growth.
Ben Gran is a freelance writer from Des Moines, Iowa. Ben has written for Fortune 500 companies, the Governor of Iowa (who now serves as U.S. Secretary of Agriculture), the U.S. Secretary of the Navy, and many corporate clients. He writes about entrepreneurship, technology, food and other areas of great personal interest.