What is the process for changing my business structure?
The process for changing your business structure varies depending on your location, current business type and what type of business type you plan to transition to. Generally speaking, changing a business's structure involves:
- Filling out legal forms.
- Making legal documents.
- Filing those documents and forms with your state (and paying fees).
- Transferring liabilities and assets to the new business entity.
- Ending the prior business entity, if applicable.
In many states, the Secretary of State's office may provide an overview of the process and rules for changing your business structure. You may, however, want to talk with a lawyer about the unique and specific issues that may apply to you or your business.
A new business structure could affect your individual legal liability, income taxes, ownership, and the way your business operates. While many structures limit the owner's liability, some, such as a sole proprietorship, do not. Some structures limit who can own the business. For example, noncitizens who do not reside in the United States generally may not own an S-corporation. Some business structures, like a C-corporation, require more administrative time and expense.
If the change in structure requires the dissolution of your existing business, you may be required to:
- Obtain a new Employer Identification Number (EIN).
- Apply for a license for the new business.
- Open a new business bank account.
Additionally, some of your existing contracts may not be eligible for assignment or transfer to the new entity. Dissolution of an existing business may be taxable and come with other expenses, costs, and consequences.
How can I change a sole proprietorship into something else?
Unless organized differently, a sole proprietorship is the default organization for a business operated by an individual. Although sole proprietors may obtain a trade name, the business is still treated as a sole proprietorship.
If you want to change your business to a partnership, in many states, a signed Partnership Agreement forms the partnership. If you want the business to be a limited liability partnership, that usually requires filing documents with the state.
Changing a sole proprietorship to a limited liability corporation (LLC), S-corporation or C-corporation requires filing the appropriate paperwork. An LLC requires Articles of Organization and an Operating Agreement. S-corporations and C-corporations typically have Articles of Incorporation, Corporate Bylaws and Stock Certificates. S-corporations and C-corporations may have shareholder meetings, whereas LLCs may operate without formal meetings depending on state law.
How can I convert a partnership or LLC to a corporation?
Depending on the state, your partnership may require a statutory conversion, a statutory merger or partnership dissolution before you can form a new corporation. A statutory conversion is typically the preferable option if available. A conversion from a partnership to a corporation may, however, result in more tax liability.
A conversion from an LLC to a corporation may be achieved through a statutory conversion or a statutory merger. Again, a statutory conversion is the preferable route when that option is available. The tax implications of a conversion from an LLC to a corporation can vary widely.
If you want to change the tax status of the LLC so that it is taxed as a C-corporation or an S-corporation, you may make that change with an IRS filing. An LLC currently taxed as a partnership or sole proprietorship can elect to be taxed as a C-corporation by filing IRS Form 8832 or as an S-corporation by filing IRS Form 2553. When making this change, the entity remains an LLC at the state level.
How can I change a C-corporation to an LLC?
Turning a C-corporation into an LLC can be complicated and is typically more expensive than other business structure changes. It can also result in tax liabilities for both the C-corporation and its shareholders, so consult a tax professional before making this change.
Some states allow a streamlined statutory conversion by simply filing forms with the respective governmental office provided the C-corporation's shareholders approve a merger with an LLC. If a statutory conversion is not available, then a statutory merger, which is typically more expensive and complicated, may be an option.
Prior to changing the business structure, you may determine how the new LLC will be taxed. A single-member LLC is taxed as a sole proprietorship. A multi-member LLC is taxed as a partnership. If you want a different taxation format, you can make a request to the IRS. A tax professional can assist you with determining the appropriate type of taxation for your new LLC.
How can I convert a C-corporation or LLC to a sole proprietorship or partnership?
Converting a C-corporation or LLC into a sole proprietorship or partnership typically requires dissolving the existing business, liquidating the assets of the business and distributing the assets to the shareholders or members prior to starting the new entity. Dissolution of the existing C-corporation or LLC will have tax and legal ramifications.
A sole proprietorship begins as soon as you start doing business without first forming a partnership, LLC, or corporation. Although there are generally no state filings required to operate as a sole proprietor, you may want to obtain an EIN for the business so that you do not have to use a Social Security number. Also, you may be required to obtain the necessary local permits or licenses required to operate a business in your area.
In most states, a general partnership becomes effective as soon as the paperwork is signed. If you want a limited liability partnership, however, filing the appropriate documentation with the state typically is required.
To learn more about changing the structure of your business, reach out to a Rocket Lawyer network attorney for affordable legal advice.
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.