Should you change your business structure?
As your small business expands and evolves, it may make sense to consider changing its structure. Many small businesses start out as sole proprietorships or partnerships, with only one or two owners and no employees. Over time, as your business grows and changes, a more complex business structure may become beneficial. There are several key considerations in deciding whether a change in your business structure may be right for you and your company.
Protection from personal liability. If your small business has hired employees, taken out loans, or provided products or services to customers, you, as the owner of the business, may be exposed to extensive personal liability for business-related damages in lawsuits against the business unless you have selected a business entity that limits potential liability to business assets. In an LLC, for example, members can only lose the amount they have invested in the LLC, and they are generally not liable for business debts or obligations.
Changes in ownership. If you have been a sole proprietor, but now want to add one or more business partners, it is beneficial to formalize the arrangement by entering into a partnership or limited liability company (LLC), with a partnership or operating agreement that clearly spells out everyone’s rights and obligations.
Obtaining financing through a bank or funding from investors. Banks often prefer to give loans to businesses that have opted for a more complex business structure, seeing them as less risky. If you are planning on seeking a loan, it may be advantageous to invest in the effort required to adopt a more formal structure. Investors also often prefer business structures that minimize their risk. For example, in a limited partnership, limited partners, who have invested money in the business but have a minimal role in its day-to-day operations, are not liable for business debts or obligations.
Different tax treatment. Some business structures, such as sole proprietorships, partnerships, certain LLCs, and S corporations are pass-through entities, which may be eligible for the 199A deduction under the new tax law. However, the corporate tax rate also was reduced to 21% under the new law. These factors, as well as whether you must pay self-employment taxes, should be considered in determining the most advantageous structure for your particular business.
Give Us a Call
There are many factors to consider when deciding whether to change the structure of your small business. The Howe Law Firm can help you think through and implement the business structure that is the most advantageous for your individual circumstances. Please contact us today to set up a consultation.