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How To Know When To Change Your Business Structure

There is an old saying that says luck happens when preparation meets opportunity. When it comes to running a small business, much of your work is about preparing for the next opportunity. And this just might let you know when to change your business structure for the better.

Planning for the future is a critical skill that any business owner must develop. And any plan for small business growth needs to include the setup of your company.

Deciding the best entity for your business takes some thought and consideration, but it doesn’t need to be overwhelming. At Angie Avard Turner Law, LLC, I help entrepreneurs protect their work in all stages of business. Most often, this starts with establishing their business structure. Schedule your time to talk today to see how I can support you.

No One-Size-Fits-All Option

If you are like most fledgling companies, then you probably started simple. When establishing a business, most people begin as sole proprietors or general partnerships. These are the default structures that are in place for your company unless you choose something different.

If you don't incorporate, you are automatically a sole proprietorship or a general partnership.

As their names indicate, a sole proprietorship is for one person, and a partnership has more than one person. The first day you start your business, you have a business structure, even if you don’t seek it out for your company. There is no extra paperwork to fill out to exist as one of these default entities.

When To Change Your Business Structure

For companies that begin as a sole prop or general partnership, there are no protections in place. The owners’ personal assets are at risk if any lawsuits or creditors come after the business. Because of this reason, many entrepreneurs quickly realize they need the legal protection a different structure can offer.

Here are some signs that it is time to change your business entity.

You Want To Limit Your Personal Liability

I always tell clients that the right time to protect their work is now. Regardless of the decisions you made for your business in the past, now is the perfect time to get protections in place.

Knowing when to change your business structure often comes down to protection and taxes.

Generally, if protection is your primary goal, it’s time to incorporate. Even a simple limited liability corporation (LLC) puts up significant legal guardrails for your personal assets. Shifting from a sole proprietorship or general partnership to a corporate structure is an essential step.

You do not need to have employees or a certain level of revenue to incorporate. This option is yours for the taking any time. Once you have a corporate business structure in place, people cannot take legal or financial action against you personally for business-related issues. A professional legal advisor can help you determine the best level of protection for you.

You Want To Limit Your Tax Burden

It’s pretty safe to say that every business owner wants to reduce their tax burden. Changing your business structure is an excellent place to start when you’re looking for ways to lower business taxes.

When you operate as a general partnership or sole prop, the company’s profits all pass through to the owners for tax purposes. If your personal tax rate is higher than the corporate one, you will pay more in taxes.

Limiting your tax burden is one of the reasons to change your business entity.

One of the tax benefits of an LLC or other corporate structure is that you account for the business profits and losses separately from your personal income. Depending on the tax rates and level of revenue, you may want to change your business structure away from the default setups.

You Want To Hire Employees

To hire a W2 employee rather than an independent contractor, you need to have a federal EIN. This is true no matter which type of business structure you have. If you want to hire employees, it’s time to consider that protection piece of the puzzle again.

That is, when you hire people in your business, the risks increase. You now have more people who could make a mistake or create a problem that comes back to impact your personal assets. If you’re ready to hire, you’re ready to incorporate.

You Want To Attract Investors

When you’re ready to grow your business, you will likely need funding through loans or investors. The reality is that people with money to loan or invest are not impressed by sole proprietorships or general partnerships.

Setting up a corporation is a great way to open the door to investors.

Banks, credit unions, and other funding sources are not willing to assume the risks of being unincorporated. They want to see a higher level of professionalism and protection before they consider investing or lending money. To spur on your small business growth, you will probably need to change your business entity.

An LLC is sufficient for some lenders and investors, especially when you’re dealing with smaller amounts of money. But to play in the big leagues, so to speak, you might need to establish a C Corporation that can issue stock and have shareholders.

How To Change Your Business Structure

If you’re working with a legal advisor and a tax advisor, it will be simple to know when to change your business structure. And the good news is that it’s a fairly straightforward process to make a switch.

Your lawyer and tax advisor can make it simple to switch your business structure.

Your attorney can assist you in filing the appropriate paperwork when it’s time to change the type of business entity you have. They can help make sure you cover any of the following that apply to your situation:

  • Partnership Agreement

  • Operating Agreement

  • Distribution of Assets

  • Shareholder Agreement

  • Articles of Incorporation

  • Dissolution of Company

  • Transfer of Assets

Protect What You Create

Anything you create deserves protection. As a creative entrepreneur myself, I understand how crucial this is. At Angie Avard Turner Law, LLC, I help brilliant people guard their work so that they can share it with the world without giving it all away.

Everything from contracts to copyrights is in my area of expertise and passion. You can reserve a time to talk and get the legal advice you deserve. I can’t wait to learn more about what you do!

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