The business entity you chose when starting your business might not be appropriate when you add on a partner, hire additional employees, or introduce new offerings. Learn how to change your business structure to adapt your small company.
Can you change your business structure?
First things first—can you legally change your business structure after you’ve officially formed your business? Or if you never officially established a business entity (and were automatically structured as a sole proprietorship), can you change your business structure?
In most cases, you can change your business type. Consult your state and a small business lawyer to find out if you can change your business structure from the one you have to the one you want.
Reasons you might change business entity
There are many reasons why you might want to change your business structure. First, let’s review your basic business structure options:
- Sole proprietorship
- Limited liability company (LLC)
If you currently have a simple business structure, such as a sole proprietorship, you might need to change your entity to keep up with growth. Or if you have a complex structure, like a corporation, you might choose a more straightforward structure to decrease fees and save time.
Some businesses change structures when they are struggling with low profits. If your current structure isn’t a good fit for your business model, it might be holding back your small company.
Another reason businesses change their structure is to increase liability protection. Sole proprietorships and general partnerships do not enjoy limited liability like corporations and LLCs. If you are concerned about your personal assets, you may change structures to limit your liability.
You might have started your business on your own, but at some point, you may decide to bring on a partner. If you add a partner or shareholders, you must change your business structure to a partnership, corporation, or multi-member LLC.
How to change your business structure
Once you’ve decided it’s time to change business entity, you can begin the process. Get started with these four steps to learn how to change business type.
1. Research business structure options
Before you commit to changing your business entity, understand the other forms of business. The grass might look greener on the other side, but there are advantages and disadvantages to each entity.
Business structures differ when it comes to things like liability, taxation, and ownership. Ensure that your desired entity is the best business structure for your small business.
2. Consult an expert
Structuring your business majorly impacts your company. Before you change your structure, you should consult a small business attorney to weigh your options.
You also need to check with your state government to verify that you can change your business structure to the type you want. And, states have different filing requirements for changing your structure.
If restructuring impacts other parties, you must notify them and get them to sign off on the change. For example, if you own a corporation and want to restructure as a sole proprietorship or partnership, you must talk with your shareholders. Your shareholders will need to give up ownership in your business.
3. File paperwork
After determining if changing to your desired business structure is possible, you can start filing paperwork. Changing business structures is similar to choosing your business entity for the first time—you must register your new business structure with your state.
Your state might require you to select a unique business name and register it. If you have the same business name as another company with the same business structure, you must change it. And, some business structures must have a doing business as (DBA) name, depending on where you conduct business.
Generally, you must obtain a new federal employer identification number (FEIN) from the IRS when you change your business structure.
Depending on your new business structure, you may need to file additional paperwork. For example, if you are switching from sole proprietorship to LLC, you must file articles of organization.
When you change your business entity, you may also need to reapply for business licenses and permits to operate.
4. Update your contacts
Don’t leave your bank, vendors, insurance company, and customers in the dark when you change your business structure. You need to update your contacts as soon as possible, especially if the restructuring impacts them.
Restructuring may affect your ability to combine personal and business funds. If you restructure as an LLC or corporation, you must open a separate bank account for business. Talk with your bank for more information on opening a new account.
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This is not intended as legal advice; for more information, please click here.