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Signs You Need To Change Your Business Structure

As your business evolves, you may find that what worked yesterday doesn’t necessarily work today. Often, businesses find that they need a new business structure that better reflects today’s realities. You may want to change your business structure if: your tax burden is too great, you are too at-risk, or if your tax structure is impeding the sale of your company.


Here are a few examples of changes you might make and why…


C Corp To S Corp

If you’re a small business, you may begin wondering if the “C” in “C Corp” should stand for “complicated” or “costly.” Tax advisors often recommend making the switch to an S Corp to avoid the dreaded double taxation. The good news is that you can make the switch just by filling out one simple form within 75 days of incorporating or the new tax year.   


LLC To C Corp

Perhaps you weren’t thinking about attracting angel investors or creating a stock option for your small business. You just wanted to get started quickly, cheaply and easily. If you’ve outgrown your LLC status, you’ll be in a better position to receive venture capital funding if you are a C Corp. The process depends upon individual state corporate laws, but often businesses create a new C Corp and file the LLC as a subsidiary of the newly formed company.


C Corp To LLC

Most people faced with double-taxation will switch to S Corp status, but this is not possible for non-U.S. citizens. They can, however, switch to an LLC to take advantage of a lesser tax burden. Unfortunately, most states don’t allow this type of restructuring, so business owners will likely need to dissolve the C Corp and form a new LLC.


Employer Identification Number

According to the Internal Revenue Service, there are certain times that you MUST apply for a new Employer Identification Number (EIN) and change the structure of your business.


You must do so if:

  • The organization or ownership of the business changes
  • You incorporate a sole proprietorship
  • You form a partnership


You won’t need a new EIN if:

  • You decide to change your business name
  • A partnership or corporation declares bankruptcy
  • You choose the S Corp taxation model
  • You change or add locations to your business


How To Make The Switch

It’s important that you keep it simple to start, but to change as soon as possible when your business grows, as you may be subjected to capital gains tax and stamp duty during the switch that can be a distraction from your upward growth trajectory.  


Since the legal intricacies of changing business structure can be tedious and confusing, you’ll need to enlist the help of an attorney, an accountant or a business filing service company. It’s relatively common for a business to need a business structure change, so don’t feel you need to stick with your original decision out of convenience. Most entrepreneurs will agree that it’s easier to switch than it was to go through “round one” paperwork.



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Related Articles:
IRS: Changing Your Business Structure
Small Business Trends: Is It Time To Change Your Business Structure?

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