Many businesses start as sole proprietorships. While this business structure is easy to form for new entrepreneurs, when your company has grown you will seek to limit your liability. How do you know when your business is ready to evolve? What structure should you change to? How do you make the switch to another entity type? As a growing entrepreneur, you should discuss these questions with an experienced business attorney to guide you to make the right decision.
When Should You Change Business Structures?
When you first started your business, you probably chose a sole proprietorship because it was sufficient for your needs. This structure does not require registration and is easy to manage. A sole proprietorship does not offer any legal protection for owners — as you increase your revenue, another structure may provide greater protection and tax flexibility.
Some common reasons a business owner might consider changing from a sole proprietorship to an LLC or corporation include the following:
- You start paying employees
- You rent space
- You want to provide your employees with benefits
- You take on a partner or shareholder
- You plan to make investments
- You are seeking financing
You don’t have to wait for one of the above reasons to change business structures. Planning ahead is always a good idea. Making structural changes before the need for them arises is always better than being caught behind the eight-ball. Not only does planning ahead allow you to take advantage of any tax benefits, but you can ensure you are protected from incurring personal liability.
How Do You Change Business Structures?
Before you change your business structure, an entrepreneur should consider the needs of their company. You should consider the liability protections, tax benefits, and formation requirements of each structure and select the one that will help you meet your goals and objectives. Choosing the wrong structure could result in unintended tax consequences and other complications that can impact your bottom line.
Although setting up a sole proprietorship is relatively effortless, when you change to an LLC, partnership, or corporation, you will be required to complete a number of steps. First, you will need to formally register with New York State and any other jurisdictions in which you conduct business. Specifically, if you are forming a Limited Liability Company, you must file articles of organization with the state and create a formal operating agreement — this outlines the members’ rights, responsibilities, voting powers, and addresses allocation of profits and losses. New York State also has a publication requirement that must be adhered to when you form an LLC in order to have full liability protection.
Corporations and Limited Liability Companies also have their own requirements regarding the paperwork that must be filed with the state. Specifically, if your business is converting to a corporation, you will need to choose officers, a board of directors, and create a shareholders’ agreement. Regardless of which structure you’ve decided upon, you will also need to obtain a federal tax identification number, open a new bank account, and obtain any licenses or permits required for you to conduct business.
Contact an Experienced Business Law Attorney
Whether you’re considering converting a sole proprietorship to an LLC, corporation, LLP, or other business structure, it’s crucial to weigh the pros and cons. An experienced business law attorney can advise you regarding the business structure that will be most beneficial for you and help you navigate the procedural nuances involved with making the change. Providing reliable representation to entrepreneurs, business owners, and corporations, Brinen & Associates is dedicated to helping clients with a wide variety of business matters and committed to obtaining high-quality results. Call (212) 330-8151 or send us a message to learn more.