Forming your own company (LLC or otherwise) is a process filled with all kinds of critical decisions that will have long-standing effects on how your business performs for years to come. You have to decide on a business structure upfront before you really establish your process.
This can be a stressful decision, but at least you have the option of changing your business structure later on if you change your mind, right? Today we’re covering just that topic. If you’re wondering how to go about making a fundamental change in your company, read on.
Before You Take Action
So you feel like your company needs a change in business structure. Before you leap into action, let’s review some of the process steps involved in making that change actually happen. A change of business entity sounds like a drastic shift in how your company operates — but you may be surprised how uncomplicated it is.
Your first step should be to check with your registered state to find out what its requirements are. Business registration varies so wildly from state to state, and you may have to meet specific criteria regarding the paperwork involved. So be sure to start at your secretary of state’s office for a larger picture of what’s ahead. Sometimes, a change of business type process may require that you acquire additional or alternative licenses or insurances
In some instances, you’ll have to modify your Articles of incorporation or by-laws, while other states or counties may ask that you file a doing business as (DBA) name or register for a new employee identification number (EIN) to make the change official. No matter what you do, you want to let your bank know what you’re up to. The last thing you want is to find yourself caught in a liability or tax issue that makes matters worse for your business.
Consider Your Alternatives
Another essential step you should take before you file that change is to question your course of action. If you’re reading this article, you may already have your mind made up, but make sure you understand your decision fully. You’ll want to know what is expected of your new business type, and that may involve reaching out to an attorney or accountant to help you fully understand the legal ramifications. Most importantly, you need to ensure that your business and personal funds remain separate, especially if your company is growing.
Although many small businesses operate as sole proprietorships or LLCs, your company may ultimately be best served as a partnership, cooperative or corporation. Corporations in particular offer the most flexibility, since this includes variations ranging from C Corporations to Nonprofits. Corporations often enjoy a larger tax break than other companies, but ultimately, you need to find the structure that best suits your industry and specific business activity. At the very least, be sure to review the different business entities available to you to gauge how you can make the most of your business structure before you take that leap.
Make It Official
Let’s say you’ve done your research and are steadfast in your decision to switch your company to a new business entity. If that’s the case, then you may be facing one of several different scenarios. While we can’t go in-depth on every single possibility, let’s briefly review some of the most common changes in structure that companies like yours tend to make.
Convert Sole Proprietorship to LLC
At some point, you may find that operating as a sole proprietorship puts your business more at risk than it needs to be. You may be hoping that switching to an LLC can curtail that personal vulnerability and provide a bit more protection. After all, an LLC creates a clear division between your business and personal assets.
Luckily, there’s no official conversion necessary to an LLC if you’re currently operating as a sole proprietorship. Since a sole proprietorship isn’t a registered business structure, you would simply follow the necessary steps to form an LLC from scratch according to your state guidelines.
Convert C Corporation to an S Corporation
As a C Corporation, you may encounter a situation wherein you are being taxed on both your business profits and individual income. To lower your taxes, you might switch over to an S Corporation. Since these organizations are not subject to federal income tax, they qualify as “pass-through” business entities, allowing the shareholders to pay income tax on their own profits.
Shifting from a C Corporation to an S Corporation is simple. Because the change inherently affects your tax treatment, you only need to file Form 2553 with the Internal Revenue Service (IRS) — but this needs to be done within 75 days of incorporation or the beginning of the current tax year. Check your eligibility status for an S Corporation first, though, because the requirements are a bit different than for C Corporations. In addition, not all C Corps are eligible to make this transition, so make sure you speak to a professional who understands your specific situation.
Convert an LLC to a Corporation
Once your LLC reaches a certain size, you may be looking to take your company to the next level. Converting to a corporation may be the next logical step, especially if you’re hoping to work with investors. The process of shifting from LLC to a corporation will depend on the state in which you operate.
One of the easiest approaches may be to create a new C Corporation and then simply organize your LLC as a subsidiary within it. More and more states are offering a smoother process to help small business owners take their LLC into corporate territory, so check with yours to discover the best route you should take.
Changing Business Structure
If you’re finding that the time has come for your company to evolve, you shouldn’t feel boxed in by a decision you may have made years ago. After all, the exciting thing about the business world is how much your company can develop over time. If you need guidance to help your company successfully navigate today’s crowded business landscape, look no further than Incfile. With our extensive resources, you’ll be able to confidently confront the challenges ahead for your business. To learn more about how we can help, check out our website and get started today!