One of the first decisions an entrepreneur needs to make is what legal formation structure they intend to use for their company. The form or entity type that they select can affect everything from their control over the company to their income tax obligations.
Typically, those who start businesses select a specific business type and structure the company around that decision. It is therefore crucial to give that decision careful consideration. Sometimes, business owners reach the realization that the type of business they run is not the best option given current company circumstances. It is sometimes necessary to change the type of business. The following are some of the most common reasons why.
A change in company function
Perhaps an entrepreneur started the business with a specific model in mind, but they have yet to achieve success. They may have realized that they need to move into a different industry or change how the company operates to generate adequate revenue. If the purpose of the company shifts, then it may be necessary to change the business type as well when switching over to a new operational model.
Financial challenges
Maybe someone running a sole proprietorship has become concerned about personal liability as the company has grown. Perhaps the tax implications of their current business structure lead to a decrease in overall profitability. It may sometimes be necessary to change the form of a business for the sake of liability protection or reduced tax applications.
A need for support or independence
Sometimes, co-owners are the reason one owner decides to change the type of business they run. They may want to convert a partnership to a sole proprietorship or a privately-held limited liability company (LLC). The goal is to continue running the company but without a partner who has not proven as useful as the owner expected them to be. Other times, the need for additional support with day-to-day operations or finances might prompt an owner to change a business’s structure. Turning a sole proprietorship into a partnership or corporation could help someone bring in a co-owner or investors for the benefit of the organization.
The process of changing a business from one type of legal structure to another is different from the process of dissolving one company and starting a different one. Receiving the right support when making major changes to a business can help someone manage what can be a stressful and complex process designed to facilitate more successful operations in the future.
