- The business structure for your company is one of the most important decisions you'll ever make. However, you can change the structure at any time.
- Most owners review liability protections and tax advantages as part of choosing the right business structure.
- Common business structures include corporations, partnerships, sole proprietorships, cooperatives and limited liability companies.
Your business structure is the backbone of your company. It dictates your control, liability, and taxes and sets the pace for your entrepreneurial journey. However, the first structure you choose doesn't have to be permanent.
"As your business matures, you may find that your current structure no longer fits your needs," said Brittany Nevels, business and branding coach and owner of BE Different Designs. "A company that started out as a sole proprietorship may add a partner, hire a staff, or produce products or services in a capacity that requires more protection. Likewise, a larger corporation may find that they need to downsize and may feel that an LLC may be a better fit."
If your original plan isn't working for you, you can choose a different one – if you're willing to undergo the process. Here's how to change your business structure.
1. Check your state regulations.
Because different states require different steps and paperwork, you should check with the secretary of state where your business is registered, said Nevels.
"You will also want to be sure that the change in structure doesn't need any additional license or insurances," she added. "That will also vary depending on the business type and location. Some counties will require additional documentation outside of what the state requires."
Shlomo Zalman Bregman, business attorney and founding partner of The Law Offices of Samuel M. Bregman, said you may need to modify your articles of incorporation and company bylaws, file a DBA ("doing business as") with your state's government, register for an Employer Identification Number, and notify your bank of any documented changes. Also, research whether your new structure will have filing fees, new forms and paperwork requirements.
"In many states, a limited liability company [is required to] create a concomitant LLC operating agreement, which spells out in detail how the LLC shall be governed, and … is filed with the state," said Bregman. "The creation of the operating agreement often necessitates a lot of work and could trigger several thousand additional dollars in legal fees."
You want to understand the details of each option before moving forward to avoid any potential issues with liability or taxes.
2. Ask yourself these questions.
Depending on the product or service your company offers, Nevels advised asking yourself the following questions:
- Will you require insurance?
- Will vendors require additional liability insurance?
- Does your state have sales tax?
- Will you be required to tax your product or service?
- Will you pay quarterly or annual tax?
- What type of product or service will you provide?
- Will you interact directly with your clientele?
- Do you run a higher risk of being sued if something goes wrong?
- How much money do you have to invest in your initial startup?
3. Consider your options.
Bregman said it's important to know all your options for your business's legal structure.
"It's almost impossible for a layperson to figure this out on their own," he said. "It's vital to communicate and strategize with a seasoned business attorney, and probably afterward with your accountant as well."
Types of business structures to consider
These are the most common business structures:
- Sole proprietorship: One person is responsible for the entire company's profits and debts.
- Partnership: Two or more people share ownership of the company.
- Limited liability company (LLC): Owners have fewer liabilities while enjoying flexibility and tax benefits.
- Corporations: The business is a separate entity from its owners. There are several kinds: C corporations, S corporations, B corporations, close corporations and nonprofit corporations.
- Cooperative: This type of business is owned by the people it serves.
Sole proprietorships and LLCs are the most popular options for small businesses, said Nevels, but they're not the only choices. "Some operations may find that a full corporation will be more beneficial for them. Corporations are taxed differently, so many organizations find they get a larger tax break under this structure."
However, Nevels added, if your business provides a service (like event planning or photography) and deals with clients, an LLC might be best to protect you from being sued as an individual.
"There are some exceptions, but in broad terms, the LLC prevents the individual from taking your personal assets," she said. "Instead, they sue the business solely … In LLCs and corporations, it is imperative that you keep the business funds away from your personal funds. Failing to do so runs the risk of piercing the corporate veil, and putting yourself and your business at risk."
According to the Small Business Association, other business structures include associations, nonprofit corporations, limited liability partnerships and close corporations.
- An association is formed when a shared group has a common interest or activity.
- A nonprofit corporation is a legal entity that doesn't perform services in pursuit of a profit. Instead, the nonprofit must be pursuing a goal as part of its operations. Many charities are registered as nonprofits.
- A limited liability partnership is set up in a similar way to a partnership. The key difference is that one partner doesn't have any liability for the negligent actions of another partner.
- Close corporations follow a similar setup to B-corps. However, close corporations have less stringent rules and can be governed by a group of shareholders without the need for a board of directors.
For more advice on choosing the best legal structure for your business, visit this article on our sister site, Business News Daily.