4 Reasons to Switch Business Structures

Many small businesses start out as sole proprietorships. But as the business grows and people begin to express an interest in it, the business owner might need to think about changing the structure.

Here are four reasons that you might need to change your business structure:

  1. Addition of partners.

    If you decide that you want to share the responsibility for management and decision-making, then you will need to change the structure of your small business.

    For example, you would do well to consider becoming a partnership or a corporation. If you want to incorporate, there are several possibilities: a C-Corporation, an S-Corporation, or a Limited Liability Corporation (LLC).

    Bringing in partners with specialized knowledge may be a good way to go, since your workload can be distributed according to your partners’ abilities.

    However, just as in a proprietorship, your liabilities will still remain high, and you could end up paying for your partners’ mistakes.

  2. Injection of outside capital.

    If you have an offer that offers you the prospect of expanding your business in a positive way, you might want to consider a C-Corporation, especially if a lot of money is involved.

    Most big and medium-sized companies use this structure. In this type of organization, you can issue shares to the general public in exchange for a portion of the company’s profits. This will provide access to cash from shareholders, who in turn will receive profits either short-term in the form of dividends, or long-term in the form of the worth of the shares.

    A corporation has more access to money than a proprietorship. Liquid capital is very important to the long-term growth and success of any business. The trust factor might also go up since many people prefer to deal with corporations rather than individual proprietary firms.

  3. Limiting personal liability.

    When you are managing a proprietorship or are a partner in a simple partnership, then you are personally liable if anyone files a lawsuit against your business.

    This means that your assets such as your home, car, etc., can be attached by the court if you lose a case which was filed against you. Once you incorporate, then you can organize in such a way that your assets are protected.

    This can give you peace of mind, since your liability is now limited to only the amount that you have invested in your business.

  4. Tax savings.

    Once you incorporate, especially as an S-Corporation or an LLC, you will be able to save on taxes and will be spared double taxation. This, however, varies from state to state.

    You can also split the income from your business by registering your spouse and other family members as shareholders of your company. This will enable you to divert income to members of the company who may be in lower tax brackets.

    You can also hand out dividends to shareholders as a means of distributing profits without attracting high tax rates.

So check out whether switching your business structure can be advantageous to you and your small business. Note that changing your business structure may also cost money – but the advantages of changing may balance it out.

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