Successful businesses evolve over time. Often as a business moves past its initial stages it outgrows its old legal structure. Wise business owners regularly evaluate their current business structure to see if it is still meeting their legal, financial, and tax needs. They also consider what their needs are going to be in the near future. Having the right business structure is a key element in the long-term success of any venture.
Myths about Changing Your Business Structure
Sometimes business people are reluctant to even consider changing their business structure because they have heard it is too expensive and too complicated. While every situation is unique, changing the legal structure of your business is often much more straightforward than you have heard. Additionally, not doing something just because it is complicated can be bad for business. The best ways to protect your business and to set yourself up for greater future growth may be to change your business structure.
Another common myth about changing your business structure is that it is so easy anyone can do it. While you may not legally be required to have a lawyer help you with a business structure conversion, if you do not have an experienced business formation lawyer overseeing the process it is easy to make mistakes that can have serious legal consequences and that could negatively impact the future of your business. Often, it takes more than just filling out a form to properly complete a change in business structure. You may also need to use a merger or to legally dissolve an old business entity.
Business Growth and Asset Protection
Many businesses, including many Fortune 100 companies, start out as sole proprietorships or partnerships. These business entities don’t require any special paperwork and are flexible enough to allow entrepreneurs to do whatever they need to do to grow the business.
When a business first opens there may be no assets that need protecting. But, asset protection is about more than just shielding your business profits from lawsuits. It is also about shielding your personal assets from a lawsuit. If you are a sole proprietor or a partnership you may be just one accident away from wiping out everything you have worked so hard to build.
Many businesses also reach a point where they may need additional capital to grow. The vast majority of investors are not interested in risking their money in a business that doesn’t have a more robust corporate form. Even if your business is an LLC, if you want to secure investor financing you may need to convert to a corporation that is shareholder owned.
Having the right business structure allows your business to grow with a sound legal and financial foundation, protecting your hard work.
Greater Tax Flexibility
Taxes are usually the last thing on an entrepreneur’s mind when they start the process of transforming their idea into a viable business. But, it doesn’t take long for taxes to become a major concern.
Depending on your business, changing your legal structure may give you greater tax flexibility. If you are a pass through organization like an LLC or a sole proprietor, all the profits are getting passed on to you, but so is all of the tax liability. The more you grow and the more complex your business’s financial dealings become, the more important it may be for you to have a corporate structure that allows the profits to stay with the company. This may give you more options when it comes to reducing your tax liability.
Because taxes are such a complicated area, you need to consult with a professional before you choose to reorganize your business.
Protecting the Future of Your Business
You are not just building a business to fund your lifestyle today. You may be hoping to build something that will stand the test of time. Your business may be a part of the legacy you hope to leave to your children, or to the world. You may also want to build an asset that you can sell to fund your retirement.
Some business structures are going to make it easier than others to pass your business on to someone else. If you have a sole proprietorship or partnership, it will be much more difficult to fully control the future of the business than having an LLC or a corporation.
If you are already an LLC, you will want to reevaluate your future plans to see if this structure will be robust enough to meet your needs in the future.
Take the time to carefully think about how well your current business structure is serving you. If your business has changed, it doesn’t make sense to keep using a structure that doesn’t meet your current and future business needs.