Stuck in a rut with your current business structure? You’re not alone. Entrepreneurs often find themselves outgrowing their initial setup. After all, as your business grows, the foundation it stands on should evolve too.
Below, we’ll explain how to know when you need to change your business structure and walk through the implications of making a change.
Signs Your Business Structure Needs a Change
Your business structure should grow with your business—not hold it back. Has your business undergone significant growth, a change in ownership or expanded geographic reach? These are just some signs it’s time to rethink your structure. Here are 10 reasons to consider:
- Growth and scaling needs. As your business expands, you might need a business structure that can handle additional employees, more complex operations and bigger distribution networks.
- Funding and capital needs. If you’re ready to take your funding to the next level, a change in structure can make your business more attractive to investors. Corporations, for example, tend to have more options for raising capital than other types of business structures.
- Risk management and liability. As your business grows, so does the potential for risk and liability. Protect your personal assets by shifting to a business structure that offers limited liability, such as a corporation or a limited liability company (LLC). This strategic move can shield your personal life from the ups and downs of running a business.
- Change in ownership or management. Planning to bring in new partners? Or maybe you’re thinking about a succession plan for when you retire. Transitioning your business to an LLC or corporation can provide clear guidelines to help manage the process smoothly and transparently for everyone involved.
- Tax flexibility and benefits. If you’ve been getting hit hard during tax season, it might be time to consider other business structures. For example, corporations face potential double taxation, since income is taxed at both the corporate level and at the personal level as dividend income. LLCs, on the other hand, enjoy pass-through taxation, which could help lower your tax bill.
- Geographical expansion. Growth is exciting, but if your business is spreading to new states or countries, you’ll need a business structure that adapts to the rules and regulations of your new territory.
- Operational efficiency. As your business operations grow more complex, a structured approach can become essential to managing everything effectively. For example, transitioning from an LLC to a corporation establishes a more formal management hierarchy, which can better guide delegation and improve decision making.
- Enhanced credibility. Restructuring into an LLC or corporation can enhance your standing with customers, suppliers and banks alike—it’s a move that can increase trust and open new doors.
- Business incentives. Regional incentives—such as tax benefits or eligibility for government contracts—sometimes favor certain business structures. Changing your structure can help you take advantage of those opportunities.
- Corporate culture and employee engagement. If you’ve been exploring equity-based incentives to build a stronger culture and deepen employee engagement, your business will need a corporate structure in order to support an employee stock ownership program.
The Fine Print: Legal and Tax Implications of Restructuring Your Business
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.
Checklist: Steps to Change Your Business Structure
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.
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