Two of the most common business structures that people utilize when first forming their own business is a sole proprietorship or some form of partnership. While these two common business structures are well-suited to startup businesses as well as ongoing successful companies, there are aspects of operating a business that do change over time.
The nature of a business is that it does need to change in order to adapt to shifting markets and changes in customer needs. Because of this, savvy business owners will take the opportunity to monitor the legal structure of their business and determine whether it is still the best fit for the current business climate.
The primary consideration for changing a business structure is determining whether it has outgrown the benefits of its original structure. For instance, if a standard delivery service began as a sole proprietorship or a partnership and then moved on to deliver dangerous or hazardous material, changing that business structure to a limited liability company or corporation would provide greater personal asset protection for the owners. Business owners should consider any potential liability their company faces and whether or not that liability can be transferred to their personal assets. If so, a possible restructure might be in order.
The main goal of starting a business is to acquire greater personal wealth. Hard work and determination are the main ingredients to any successful business, so protecting personal assets by restructuring into a LLC or corporation only makes good business sense.
As a business grows and the customer base expands, it is only natural that its liabilities might increase as well.
Many businesses turn to business insurance to help mitigate many of the risks of operating, and if this effectively covers your sole proprietorship or partnership against liability, then there is little reason to convert to an LLC or corporation.
The main reason that a business might change its structure from a sole proprietorship or partnership to an LLC or corporation is that it requires greater tax flexibility. Increased profits, expanding the workforce, and providing fringe benefits are indications of an expanding business.
Unlike sole proprietorships and partnerships, corporations offer different tax advantages that enable individuals to deduct certain items from their tax liability that they could not as an owner of a sole proprietorship. Whether it is increased protection of personal assets or reducing personal tax liability, restructuring a sole proprietorship or partnership into an LLC or corporation makes good business sense if the company has grown beyond the protections of its original structure.