How to change your Business Structure

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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 pace of the entrepreneurial journey. On the other hand, the very first structure you select does not need to be permanent.

How to change your Business Structure “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 sole 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.

How to change your company structure

1. Check your state regulations

Because different states require different measures and paperwork, you need to consult the secretary of state where your company is registered, stated Nevels.

“You may also need to make sure the shift in structure does not require any extra permits or insurance,” she added. “This will also change based on the company type and location. Some counties will need extra documentation beyond the state requirements.”

How to change your Business Structure 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”) with your state’s government, register for an Employer Identification Number, and notify your lender of any recorded changes. Additionally, research whether your new structure will involve filing charges, fresh forms and paperwork demands.

For businesses operating in Colorado, you’ll also want to familiarize yourself with tools like a Colorado sales tax calculator to ensure compliance with state tax obligations under your new structure.

“In most states, a limited liability company must create a concomitant LLC operating agreement, which spells out in detail how the LLC shall be governed and is registered with the state,” said Bregman.

“The production of the operating agreement frequently necessitates a great deal of work and may trigger a few thousand dollars in additional legal fees.”

2. Ask yourself these questions

How to change your Business Structure 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

How to change your Business Structure Bregman said it is important that you understand all of your options 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 are the most common business structures:

Sole proprietorship: One individual is accountable for the whole business’s debts and profits.

Limited liability company (LLC): Owners have fewer obligations while enjoying flexibility and tax advantages.

Corporations: The organization is a separate entity from its owners. There are many types: C corporations, S corporations, B corporations, close corporations and nonprofit corporations.

Cooperative: This type of business is owned by the people it serves.

Sole proprietorships and LLCs are the most popular options for smaller companies, stated Nevels, but they are not the only choices.

“Some operations might realize that a full corporation will be beneficial for them. Corporations are taxed differently, so many organizations find they get a bigger tax break under this structure.”

How to change your Business Structure However, Nevels added, if your company provides a service (such as event photography or planning) and deals directly with customers, an LLC may be best to protect you from being sued as an individual.

“There are a few exceptions, but in broad terms, the LLC prevents the person from putting their own personal assets at risk,” she explained. “Instead, they sue the company solely… In LLCs and corporations, it is very important that you keep the company funds separate from your personal funds. Failing to do this runs the risk of piercing the corporate veil and placing yourself and your company in danger.”

How to change your Business Structure As stated by the Small Business Association, additional small business structures include associations, nonprofit corporations, limited liability partnerships and close corporations.

An association is formed when there is a common interest or activity in a shared group.
A nonprofit corporation is a legal entity that does not perform services in pursuit of profit. Instead, nonprofits pursue a goal as part of their mission. 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 B corporations. However, close corporations have less stringent rules and can be governed by a group of shareholders without the need for a board of directors.

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