When you decide to bring your business idea to life, one of the first and most crucial decisions you will make is choosing your business structure. This is not a decision to be taken lightly, as the structureyou select will have a significant impact on how much you pay in taxes, the paperwork you need to file, the personal liability you face, and your ability to raise money.
There are several types of business structures, each with its advantages and challenges. The goal of this article is to provide you with an overview of these main business structures, examining the pros and cons of each to assist you in making an informed decision that aligns with your business goals and personal circumstances.
Whether you’re a budding entrepreneur or an established business owner considering a structural change, the insights here will help guide you toward the choice that will serve your venture’s future best. Let’s take a closer look.
What Is a Business Structure?
When you’re starting a business, one of the first decisions you’ll make is choosing a business structure. This decision will affect everything from day-to-day operations to taxes and how much of your personal assets are at risk. You’ll want to choose a business structure that gives you the right balance of legal protections and benefits.
Sole Proprietorship
A sole proprietorship is the simplest and most common structure chosen to start a business. It’s an unincorporated business owned and run by one individual with no distinction between the business and you, the owner. You’re entitled to all profits and are responsible for all your business’s debts, losses and liabilities.
Partnership
A partnership is a single business where two or more people share ownership, and each owner contributes to all aspects of the business as well as shares in the profits and losses of the business. There are three types of partnerships: general partnerships, limited partnerships and joint ventures.
Corporation
A corporation is an independent legal entity owned by shareholders. This means that the corporation itself, not the shareholders that own it, is held legally liable for the actions and debts the business incurs. Corporations are more complex than other business structures because they tend to have costly administrative fees and complex tax and legal requirements.
Limited Liability Company (LLC)
An LLC lets you take advantage of the benefits of both the corporation and partnership business structures. LLCs protect you from personal liability in most instances, your personal assets – like your vehicle, house, and savings accounts – won’t be at risk in case your LLC faces bankruptcy or lawsuits.
Reasons to Change Your Business Structure
As your business grows and evolves, you may find that your original business structure no longer meets your needs. Here are a few reasons why you might consider changing your business structure.
Business Growth
If your business has grown significantly, you may need to change your structure to accommodate that growth. For example, if you started as a sole proprietorship but now have multiple employees and investors, you may want to switch to an LLC or corporation.
Protect Personal Assets
One of the biggest advantages of incorporating or forming an LLC is that it helps protect your personal assets. If your business is sued or goes into debt, your personal assets (like your home or savings account) will be shielded from creditors.
Tax Benefits
Different business structures have different tax implications. For example, corporations are subject to “double taxation” – the business pays taxes on its profits, and then shareholders pay taxes on their dividends. Switching to an LLC or S corporation can help you avoid this and take advantage of other tax benefits.
Easier to Raise Capital
If you’re looking to raise capital from investors, a corporation or LLC may be a better choice than a sole proprietorship or partnership. Investors often prefer to invest in incorporated businesses because it provides them with certain legal protections.
How to Change Your Business Structure
If you’ve decided that it’s time to change your business structure, here are the steps you’ll need to take.
Choose a New Business Structure
First, you’ll need to decide which business structure you want to switch to. Consider your business’s current and future needs, as well as the pros and cons of each structure. It may be helpful to consult with an attorney or accountant to determine the best choice for your business.
File Articles of Incorporation
If you’re switching to a corporation, you’ll need to file articles of incorporation with your state’s secretary of state office. This document officially creates your corporation and includes information like your business name, purpose, and management structure.
Obtain a New EIN
If you’re changing your business structure, you’ll need to obtain a new Employer Identification Number (EIN) from the IRS. This is a unique number that identifies your business for tax purposes. You can apply for an EIN online through the IRS website.
Notify the IRS
You’ll also need to notify the IRS of your business structure change. Depending on your new structure, you may need to file additional forms or change your tax election. Consult with a tax professional to ensure you’re meeting all the necessary requirements.
Transfer Assets and Liabilities
Once your new business structure is in place, you’ll need to transfer all of your business’s assets and liabilities from your old structure to your new one. This includes things like bank accounts, contracts, and property.
Update Business Licenses and Permits
Depending on your location and industry, you may need to obtain new business licenses and permits for your new structure. Check with your state and local government to determine what’s required.
Notify Customers and Vendors
Finally, don’t forget to notify your customers, vendors, and other important contacts of your business structure change. Update your website, business cards, and other marketing materials to reflect your new structure. Changing your business structure can be a complex process, but it can also provide important benefits for your business. By taking the time to choose the right structure and follow the necessary steps to make the change, you can set your business up for success in the long term.
Securing Your Business’s Future Through Informed Decisions
At the end of the day, there’s no one-size-fits-all answer when it comes to choosing a business structure. It depends on your unique circumstances, goals, and risk tolerance. But by understanding the key differences between sole proprietorships, partnerships, LLCs, and corporations, you can make an informed decision that sets your business up for success.
Remember, your business structure isn’t set in stone. As your venture grows and evolves, you may need to reassess and make changes along the way. The key is to stay informed, seek expert advice when needed, and always keep your long-term vision in mind. Our experts are available to advise you, so contact us today.
Choosing the right business structure is like laying the foundation for your dream home. It takes research, planning, and a gut check, but once it’s in place, you can start building something beautiful – your very own business!