Change can be an inevitable part of life and this is no different for your business life as well. As you’re starting out as a business owner, you probably wanted to keep things as simple as possible; however, growing businesses need more work and structure in order to be profitable. As the old adage goes, realizing you have a problem is your first hurdle. Once you’ve come to this realization, making the necessary changes can be fairly painless and typically involve some legal steps.
The biggest thing that a structure change can effect is your taxes; therefore, you should consult a tax advisor with any questions. In addition, restructuring rules vary by state, so you should make sure to check your state’s rules.
Two common structure change scenarios can occur, which include moving from:
Sole Proprietorship to LLC
While sole proprietorship businesses can be very easy to start up, they can also put you at risk if you’re ever sued by a client. In order to lessen the risks involved, you can restructure your business into an LLC (Limited Liability Company), which will separate business owners from the business itself; thus, minimizing liability.
This conversion is one of the easiest because sole proprietorships are not considered an official business structure; therefore, there is no real conversion. The business owner is simply making the decision to make their business ‘official’. In order to become an LLC, business owners must file an Article of Incorporation (a.k.a. Article of Organization) with their state.
For more information about LLCs, continue reading here.
Change from a C to an S Corporation
Many owners of C Corporations experience ‘double taxation’ where they are taxed through their corporation and then again on their individual taxes. In order to avoid this, you can convert your C Corporation into an S Corporation, which doesn’t get federally taxed. S Corporations are like LLCs and are pass through entities and shareholders only pay taxes on their portion of the profit.
Moving from a C to an S Corporation is easy, but time sensitive. In addition, since this change only effects your taxes, you make the change with the IRS, not your state. In order change, you simply need to file IRS Form 2553 within 75 days of incorporation or the start of the tax year.
S Corporations cannot be started by everyone, as the IRS requires shareholders to be both individuals and legal U.S. residents.
For more information about S Corporations, continue reading here.
Starting or progressing a business can take work. MaxFilings’ business incorporation and registered agent services can help you get off on the right foot. Continue browsing our business incorporation blog for more incorporation and general business tips.