Change is inevitable in the world of business. If a firm must endure time and challenges and expand, there has to be a little tweak in some areas now and then.
If you run a small business, for example, and want your business to grow, the best option to consider is to change the structure of your business.
Perhaps you run a sole proprietorship and want to change to something else, or you are looking to change your LLC to a partnership type of business – no matter what your reasons might be – it is possible to change the structure of your business.
And in today’s article, we will be going over how you can evaluate the changes that are best for your business and the process to carry them out. Let’s dive in.
Before deciding to change your business structure, it is vital to know what the change procedure entails with the implications of the tax such change will have.
Depending on the type of business structure you run, the location of your business, and the type of business structure you want to change into, the procedure for changing your business structure can differ from one to another.
However, as a general rule, to change your business structure, you need to do the following:
- Fill out legal forms concerning the change in your business structure.
- Create legal documents for your new form of business.
- File these documents with the state where your corporation operates and pay the necessary fees.
- Transfer all assets and liabilities to your current business entity.
- If mandatory, dissolve your previous business entity or put it to a halt.
If your transition to a new business structure compels you to dissolve your previous business, you will need to do the following:
- Open a new bank account for your business.
- Get a new EIN (Employer Identification Number).
- Apply for a new business license.
The office of the secretary of state in most states gives a synopsis of the rules and procedures involved in changing the structure of your business.
However, talking with your lawyer about the process of change in business structure and the possible issues that apply to you and your business is vital.
The transition of your business from one business structure to another can affect you and your business in many ways.
For example, a new structure for your business can affect how you run your business, your income taxes, your legal liability, and even the ownership of your business.
Yes, some business structures can limit who can have ownership rights of the corporation.
An S-corporation, for example, cannot be owned by a noncitizen of the United States who does not reside in the US.
In addition, transitioning to a C-corporation business structure will demand more organizational time and expense than other business structures.
How To Change Your Sole Proprietorship To A Partnership or LLC
As a general rule, a sole proprietorship is, by default, the business structure for a company or business run by one person.
In most States, changing from a sole proprietorship to a partnership type of business will require you to sign Partnership Agreement forms.
However, if you want your partnership business to be an LLC partnership, you would need to file your documents with the state your business is registered.
If you want to transition your business from a sole proprietorship to an LLC, you need the C of Os (Article of Organization) and an operating agreement.
And if you want to transition your business from a sole proprietorship to a C-corporation, you need a Stock Certificate, Corporate Bylaws, and Articles of Incorporation.
You can also online incorporation services such as Zenbusiness, Incfile or Northwest to get your LLC registered for few hundred bucks.
How To Change From A Partnership To A Corporation
Switching your business from a partnership to a corporation might demand a statutory merger, a statutory conversion, or the dissolution of a partnership business in some states.
Although it may result in more tax liability, a statutory conversion from a partnership to a corporation is the better option. The tax implications of a business conversion to a corporation also widely differ.
If you want to shift from getting taxed as an LLC to getting taxed as an S-corporation or a C-corporation, you can do that by filing the applicable IRS forms.
How To Change Your Business From a C-corporation To An LLC
Transitioning your business from a C-corporation to an LLC can be very expensive and more complicated when compared to other types of business.
It is advisable to consult with a tax professional before carrying out this change in your business structure because tax liabilities are soon to follow when the transition from an LLC to a C-corporation is complete.
Some states permit a statutory conversion by filing forms with the state office as long as the shareholders of a C-corporation authorize a coalition with an LLC.
Although a statutory merger is usually more complex and expensive, it can be employed when a statutory conversion is not accessible.
Whichever method of change you decide to employ, it is advisable to know how the tax for your new LLC will be before moving to another business structure.
Utilizing the services of a tax professional will assist you in determining what type of taxation is best for your LLC.
How To Change An LLC To A Partnership Or A Sole Proprietorship
To change the structure of your business from an LLC to a partnership, or a sole proprietorship, you will need to dissolve your current corporation, liquidate the corporation’s assets and distribute the assets to members of the corporation before forming your new enterprise.
Of course, dissolving an existing LLC has legal and tax consequences, so you should be prepared for that.
As we have highlighted at the onset, a sole proprietorship involves one individual running the entire business and doesn’t require much.
Therefore, you do not need state filings to begin a sole proprietorship.
However, you do need local permits in the locale where you do your business and an EIN, especially if you do not have an SSN.
For a partnership, you need to have the partnership documents signed.
And until they are signed, your business structure will not be regarded as a partnership, except when it is an LLC partnership, you will file the necessary documents with the state.
In summary, switching your business from one business structure to another might require some documentation and come with some ramifications, depending on the state where you run your business and the type of business structure you are changing.
So, do well to consider the information provided in this article.
You should also consult with your lawyer or legal adviser before carrying out your decision for a change in the structure of your business.