At any point in time, a change in the way you do business, your business’ products and services or your business’ size may make switching your business structure necessary.
Here are a few points that you should be aware of if you are thinking of making such a change.
Get Advice from a Tax Professional
You will first need to contact a reliable tax professional, certified public accountant (CPA) or lawyer to get advice about the advantages and disadvantages of changing from your existing business structure to a different one.
Only after your consultant is convinced that the change will be beneficial to you and your small business should you think about proceeding with the change.
Notify the IRS
You will need to notify the IRS about your intended change. Depending on the type of change, you might also be required to apply for a new EIN (Employee Identification Number).
For example, if you are a sole proprietor or a partnership firm wishing to incorporate, then you will need to change your EIN.
However, if you are a corporation wishing to be taxed as an S-Corporation, then you will not need to change your EIN.
Notify Other Authorities
You might also need to notify the Secretary of State about your decision to change your business structure, because you might need to reapply for licenses in some states.
You will also need to notify your bank and other financial institutions. If your business name has changed, then you will need to inform your customers and your suppliers, in addition to others involved with your business.
Changing From Sole Proprietorship or Partnership to Corporation or Limited Liability Company (LLC)
This move will enable you to limit your personal liability, but your paperwork will increase because you will need to file articles of incorporation, adopt bylaws, and hold regular meetings.
You will also need to be careful while filing your revised tax returns, or you might end up paying double taxes. An S-Corporation cannot issue shares. However, if you are shifting to a C-Corporation structure, you will also need to issue stock to shareholders and even to the public.
This change is good if you need to expand your business using public capital. Even when you change from a proprietary firm to a limited liability structure, it will be treated as a brand new business.
Changing From a Corporation to a Sole Proprietorship
This is a very complex process, since it involves convincing shareholders, and the corporation must be liquidated first. This can be a problem if your business assets have appreciated.
Your business will also have to be evaluated before making this decision. Different states have different policies regarding making such a switch. You will need to inform the IRS, and tax liabilities may accompany the change.
So, even though changing from a simple business structure such as a sole proprietorship to a corporation is fairly easy, changing back is quite difficult. Think carefully and hire a reliable lawyer or tax consultant to do the job right the first time.