Changing Your Business Structure: What You Need to Know

A business structure determines its long term financial growth and continued success. It directly influences major operational aspects, such as funding opportunities, decision making, liability, taxation and diversification. It can help mitigate potential risks while capitalizing on new opportunities. However, many entrepreneurs prefer changing their organizational structure to boost tax efficiency, minimize liability and attract new investors.

It is often the first change entrepreneurs make when the business grows and scales, particularly in a sole proprietorship. Whether transitioning from a sole proprietorship to a partnership deed or reorganizaing as a corporation firm, it requires careful planning to stay in compliance with financial, legal and operational standards.

This can also help budding individuals looking for a lucrative business for sale in Orlando, allowing them to switch the structure for massive growth potential. Worry not! Here is a comprehensive guide on transiting your business structure. This includes a professional review, key aspects and the entire process to help you make informed decisions aligned with your targeted goals and the United States business laws.

1. What are the Most Common Types of Business Structures?

A business structure is a legal framework of an organization. It outlines key factors, such as ownership and profit distribution. The structure of an entity should be developed before it is registered with the state or federal governments to avoid legal and financial penalties. Below are the most common types of business structures:

Sole Proprietorship

When an individual owns and runs the business in the US. The sole owner is entitled to all profits, losses and debits. This is one of the easiest structures to develop, requiring minimal due diligence and offering complete flexibility.

Partnership

When a business is owned and operated by two or more people, it is one of the easiest business structures for professional groups and multi-owner companies. All partners share resources, such as skills, labor, profits, losses and responsibilities of business operations. There are two types of partnerships: general and limited.

Corporation:

It is a legal business structure that is different from its owners (called shareholders). It is more complex and must comply with strict regulations, taxation and bookkeeping. Whether you want to raise funds or establish high risk business, this is the best structure for your business. Nonprofit, closed, and benefit corporations are some of its examples.

LLC or Limited Liability Company:

It is a hybrid business structure that encompasses the key features of both partnerships and corporations. It protects business owners from personal accountability while reducing tax implications and regulatory stress. The profits and losses of the entity will be distributed to the owners.

2. Key Reasons to Change Your Business Structure

Below are some of the key reasons why businesses change their structure to reach targeted goals:

Management Restructuring: If you decide to bring a partner into your business, you need to transition from sole proprietorship to a partnership structure. You’ll need to abide by a partnership agreement that should be drafted outlining roles, profit sharing and dispute resolution. You can choose this structure to adapt leadership transition.
Change in Ownership: If you acquire a promising business for sale in Orlando, you may need to modify the business structure to achieve your targeted goals and ensure continued success.

Liability Protection: Many businesses restructure to protect personal assets by restructuring the entity to restrict the owner's personal exposure to financial and legal risks.

Tax Benefits: The legal structure you select for your business can have a huge impact on your tax liabilities, and transitioning the structure may help you leverage tax benefits in the long run.

Finding New Investors: As your business flourishes, you may need more capital to fund growth and expansion or buy new stock or hire more employees. In such scenarios, you need more investors and switching to corporation structure can make a huge difference.

Business Growth: You may also need to change the structure if you want to operate in an overseas market or expand your business for sustained growth.

3. What are the common business structure changes?

Many small businesses scale up their operations and thus, transit from a sole trader business structure to a company structure, especially when it comes to hiring employees or investing in more assets. A company structure can protect your personal liability as it operates under a separate legal entity.

However, if you decide to add more partners to your business, you’ll need to apply for a new Employer Identification Number (EIN) from the IRS. You may also need to amend governing agreements, update state registrations and check tax implications. This type of transition is popular among sole traders.

To change from a partnership to a company, you need to dissolve your partnership and establish your company. However, some states allow statutory conversion, under which, partnership will automatically convert into an LLC or corporation.

4. Step by Step Guide to Change the Business Structure

Once you've decided to change the business structure, you need to review the entire process. Below is a step by step guide to streamline your journey:

Know Your Specific Needs to Find Best Options:

Believe it or not! Finding the reason for this big change is crucial for successful outcomes. Whether you want to grow your business or planning to add more partners, ensure you do proper research and choose the most suitable structure that aligns with your specific goals and growth prospects.

Moreover, small entrepreneurs seeking profitable businesses for sale in Orlando should focus on understanding the nature of business before transitioning the structure to a company or an LLC.

Consult Experts:

Do you want to restructure your business in the United States? You should hire a professional attorney for legal due diligence, filing process and necessary paperwork. Also, ensure you stay in compliance with state and federal laws throughout the process.

Do the Necessary Paperwork:

After choosing a new business structure, proceed to the next step by preparing and filing the necessary legal documents with the specific state agency (the Secretary of State's office). You must register your new business structure with your state.

For instance, you may need to submit 'articles of organization to register for an LLC while 'articles of incorporation' is needed if you want to transit into a corporation. Keep these small details in mind to avoid delays.

Get a new EIN

If you’re transiting to a separate legal entity like an LLC or corporation, you’ll need a new Employer Identification Number (EIN) from the Internal Revenue Service (IRS). EIN is used for tax purposes and hiring new employees for higher success.

Also, don’t forget to update business licenses and permits as per your new business structure. It will help you future proof your business for an ever evolving market.

Inform Everyone: Employees, Clients and Banks

There is no denying that it is one of the crucial steps towards the restructuring of your business. Apart from this, notify your employees, investors and clients.

Also, make changes to your business documents, such as bylaws and operational agreements for best outcomes. This ensures a smooth and hassle free structure transition and operational continuity.

Wrapping Up

Every entrepreneur should learn the right process of restructuring to avoid legal and financial challenges. The process should align with your long term goals for higher and continued success. The guide above can help businesses of all types and sizes to operate efficiently without any restrictions or hassle.