There may come a day when, after everything in your small business has been chugging right along for a while, that you start to wonder if the business structure you first chose is still a good fit.
Sure, initially that sole proprietorship, LLC, or corporation worked for you (or rather, it didn’t cause any issues) but now you’ve got reason to think twice about whether it’s the best business structure for your brand.
Why You Should Consider a Change of Business Structure
Maybe you started your business as a sole proprietor, but now that you’ve grown, you feel you’d benefit from incorporating or forming an LLC. Maybe you started a business so long ago, the LLC wasn’t an option in your state.
Maybe you want to sell the business in a few years, and want a business structure that will make transfer of ownership easier. Maybe you realize that operating as a C Corporation is overkill for your little business, and you want to take advantage of tax savings you’d realize with an S Corp.
Or maybe you want to bring on investors, and you’re finding that they’re not keen on giving money to an LLC, and prefer to work with a corporation.
Whatever your reason for considering changing your business structure, there are benefits to doing so.
Benefits to a Better Business Structure
If you’ve been operating as a sole proprietorship, you already know from reading this blog that your personal assets are at risk. That alone is reason enough to switch to an LLC or corporation.
If you’re thinking of changing from a C Corp to an S Corp, you’ll be able to take advantage of the S Corp’s pass-through taxation. Whereas C Corps are taxed twice (once on the profits of the corporation, and again on the shareholders’ profit), S Corps are taxed only on the owner’s personal tax return. That usually results in fewer taxes paid. By the way, that pass-through taxation is also one of the benefits of the LLC.
If you want to convert an LLC to an S Corp, you’ll be more attractive to investors, who prefer the latter structure for companies they put money into.
When to Incorporate and/or When to Form an LLC
If you’re convinced that a change in business structure is right for your business, now the question is around timing. I suggest converting your business structure before any major events come up, like funding, transfer of ownership, or selling the business. You want your business structure paperwork to be approved before any major business transaction.
The business structure you choose should feel right, and it should provide your business with ample benefits.
If you’re ready to change business structure formats, check out our free Business Structure Wizard to find the one that’s best for you.