There’s more to changing your business structure than adding “LLC” or “Inc.” to the name on your door. It’s a step that comes with important legal and tax considerations.
Understanding how this change affects your legal standing and your business taxes can save you headaches down the road. Here are some factors to consider:
Entity formation and Dissolution
Stepping into a new structure usually involves navigating your state’s requirements for forming a new entity and possibly winding down your old structure. You’ll likely need to file paperwork, pay filing fees and make sure you comply with any business regulations.
Changes in Liability
Transitioning to an LLC or corporation builds a protective shield around your personal assets, helping to keep them safe from your business’s debts and legal disputes.
Tax Obligations and Benefits
Every business structure has its own set of tax quirks. Corporations, for example, file their own returns, which exposes them to a potential double tax hit on income. LLCs, on the other hand, pass income through to their members at tax time, to be reported on their personal tax returns, which keeps things streamlined (although without careful planning, it can result in a big personal tax bill).
Contractual Obligations
Ensure your existing deals are transferred to or recognized by your new business identity. This will keep your operations running smoothly without any legal hiccups.
Employment Law Compliance
If you’re changing to a more structured entity like a corporation, you’ll need to deal with more complex employment laws. From maintaining detailed employee records to handling structured benefits, you might need to dot your i’s and cross your t’s on a whole new level.
Governance and Internal Structures
A corporate structure means more formality: A board of directors, bylaws and detailed shareholder agreements are all part of playing in the big leagues.
Funding and Financing
With a new structure, your business might have easier access to capital. This also requires stepping up your game when it comes to financial transparency, reporting and diligence. Think of it as both an opportunity and a challenge.
Estate and Succession Planning
Reevaluate how you plan to handle your business legacy. Different structures offer different paths for succession, each of which can impact not just business continuity but also your personal estate planning strategies.
Changing your structure can get complicated, but breaking the process down into manageable steps can make the transition easier. Here’s a checklist to guide you through the basics:
- Identify your needs. Assess why you need the change. Are you looking to protect your personal assets, attract investors or something else? Pinpointing your goals helps you determine the structure with the best fit.
- Get expert advice. Remember all those potential legal and tax implications? Consult with a business attorney and a tax advisor to get insight on how to navigate the complexities and impact of a change in structure.
- Choose the right structure. Once your goals are clear and you’ve talked to the experts, evaluate your options and select the business structure that best suits your business’s goals and needs.
- Prep and file the paperwork. Fill out all the forms for establishing your new structure. Once you’ve completed the required documents, file your paperwork with the appropriate state agency. This typically involves a fee, so be prepared for the expense.
- Update your contracts. Review and revise any existing business agreements, as well as your operation manuals, so they reflect your new structure.
- Announce the change. Maintain transparency and trust by informing employees, suppliers and customers about the change in structure.
- Update your financials. Make any necessary changes to your bank accounts and financial arrangements such as loans and lines of credit.
- Review compliance requirements. Ensure your new structure complies with local, state and federal regulations, which may require obtaining new licenses or permits.
Checklist completed? Don’t forget to celebrate: Your new structure marks a new chapter for your company. It’s an event that’s worth celebrating.
