When to Change Your Business Structure

By Nina Kaufman, Esq.

Now is a great time to reevaluate whether the business entity you’ve chosen for your company still meets your needs. What may have worked at the beginning may now leave you exposed. You may have outgrown your business entity, much like a seedling can outgrow the pot you planted it in. Or — like some of my clients — you may have created new divisions of products and services that took on a life of their own and need to stand independently.

Which business entity should I choose?” is often the first legal issue that comes to the mind of small business owners. But the way they go about deciding is often like trying to hammer a square peg into a round hole. They try to make their business fit a particular form, rather than determine which form best fits the business.

So rather than asking “S Corp versus LLC?” a better place to start is by asking yourself questions about your business and where you want to take it. You need to weigh and balance different considerations. For example, as I mention in my article “How to Choose the Business Structure That’s Right for You,” you’ll want to look at a number of factors, including:

  1. What are your ultimate exit strategy goals for the company? Will you want to sell it, pass it on to others or simply have it provide you with a livelihood while you are able to work? Your answer will have a definite bearing on which form will help you achieve that goal.
  2. Do you intend to have more than one owner of your business? If so, that rules out a sole proprietorship.
  3. Who are the intended owners of the business? Are they U.S. citizens or resident aliens? If not, that rules out an S Corp.
  4. Will you have any passive investors in your company–those who are happy to leave the day-to-day management to you but want a greater percentage of the profits in exchange for their investment? If so, that rules out an S Corp.
  5. Will you want to receive unemployment compensation in the event the business fails? If so, that may rule out a sole proprietorship or LLC.
  6. Do you want to take advantage of tax planning? Depending on your projected earnings, you might find (surprisingly) that a C-Corp will be the form that provides you with the most options.

As you can see, there is no “best” form of business entity that will be right in all circumstances. So much depends on your business plans and individual desires. These are questions that online services such as LegalZoom can’t help you answer. Make sure to align yourself with an attorney and accountant who understand these issues, so that when you pour the foundation for your “house,” you’ll know it’s solid.

If you liked what you read, watch our video to see if Kaufman Business Law is a good fit for you.