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When should I consider changing business structures?

Many small business owners initially do not consider whether they should use a different legal structure. Sole proprietorships and general partnerships do not require any special filings or additional effort to create—they come into fruition by default when a person starts a business alone or with a partner. Likewise, many people start their businesses off as a side venture or hobby. They only consider whether their company structure should change after it starts making a profit, grows, or adds staff.

Changing the structure may make sense as your company grows or changes focus. If you start to employ team members or your new venture becomes a full-time job, changing structures could be financially or legally advantageous. You might also want to consider a change if your business acquires significant assets.

A change in structure can have benefits for a number of business functions including:

  • Filing taxes
  • Obtaining financing
  • Limiting liability

Incorporating or creating an LLC will also show customers that your company is a legitimate business, which can help you expand your client base.

Will changing business structures make financing easier?

Generally, yes. If you want a loan to help your business grow or purchase assets, banks and other lenders may prefer financing a business with a separate legal structure. Incorporation demonstrates organization and ambition.

Similarly,  prospective investors may be more intrigued by incorporation or some formation beyond a sole proprietorship. This is because you can sell a portion of your business in exchange for capital investment. This type of investment opportunity is simply not available when you keep your company structured as a sole proprietorship.

How does business structure affect liability?

There are several reasons to change your company from a sole proprietorship to an LLC, corporation, limited liability partnership, or another legal entity. Perhaps the most important benefit is that these structures all limit your liability. Suppose your business gets sued or cannot pay its debts, for example. In those cases, creditors or others may come after your personal assets to satisfy those obligations if you operate as a sole proprietorship or general partnership. That generally does not happen with any other type of legal structure.

As a rule, it is a good idea to make a legal structure that limits liability no matter how small your company is, but it becomes more important as the business grows.

Will my taxes go up if I change structures?

Consult a tax professional or a Rocket Lawyer On Call® attorney before you make a structure change because there may be tax implications.

For example, a C-Corporation could be taxed twice—once at the corporate tax rate and again when you withdraw distributions from the company. In many cases, this structure will not make sense for small or medium-sized businesses.

However, if you choose a pass-through entity, such as an LLC or S-Corporation, your tax obligations may not change much at all. In these structures, you get the benefit of limited liability without having to pay anything extra in income taxes. You may not even need to file a separate tax form for your business.

Will I lose control of my business if I incorporate or change structures?

The only way you will lose control of your business is with new investors that have a say in how you operate. For example, shareholders or members of a company may alter your day-to-day operations.

However, there may be no changes if your investors only have an investment interest—not a management or voting interest. In that situation, management does not change, but you might still have expectations that you have to meet when you take on investors.

Want to learn more about changing the legal structure of your business? Rocket Lawyer offers Incorporation Services with legal advice tailored to your needs. Get the legal help you need anywhere and on any device using the Rocket Lawyer Mobile App.

This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.

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