3 Signs It's Time To Change Your Business Entity

3 Signs It's Time To Change Your Business Entity

That sad feeling comes when you realize that you can’t wear your favorite trousers and t-shirts anymore because they’re now too tight or dog-tired. You know, deep down, it’s time to revamp your wardrobe. However, nostalgia makes it hard to accept the changes. It’s similar to a business; there comes a time when you have to change your business entity. Feelings of nostalgia will most likely kick in, but shaking things up at the right time can give new energy to your operations.

Note that your business entity isn’t set in stone. Therefore, it’s normal to adjust your business from a basic or modest formation. For instance, a partnership or a single proprietorship can be converted to a limited liability company (LLC) or organization.

Many business proprietors make changes for different reasons. These reasons include being able to reconnect even better with their clients, or expanding their base in order to attract new market sectors. It can also be to appeal to investors, build on their risk profile, or reduce their business taxes. Or, it can simply be because they’re obtaining or amalgamating with another firm.

Here are three signs that changing your business entity might be the best move:

1. You Want More Freedom With Your Taxes

As a sole proprietor, there’s no detachment between you (as a person) and your business. This means that the Internal Revenue Service (IRS) will be at your door if you fail to declare all your business revenues on your tax return. However, if you want more flexibility or freedom with your taxes, forming an LLC or corporation is the best move.

In addition, you’ll significantly reduce your self-employment tax requirement. Furthermore, you only submit self-employment tax on your salaries and wages instead of all of your revenues earned from your business.

Additionally, there are tax rewards or benefits that come with forming an LLC. For instance, medical insurance is subtracted from your taxable income. This will allow you to retain more revenue in your business.

Business taxes and self-employment taxes sure sound like some hard legal jargon. And what’s more, forming an LLC or corporation also sounds so daunting.

However, it isn’t that complicated to form an LLC or corporation. You can do it online from the comfort of your chair; check out Start Filing, and you’re good to go. 

2. You Need To Secure Funding

Surviving the first couple of years after starting a business is no small feat for any entrepreneur. It might put a huge dent in your savings, and you might not have enough capital to expand what you started. In such a situation, you might be forced to seek a loan or hunt for a partner to acquire a share or interest in your business.

Either way, you might need to adjust your business entity to make your offer more enticing or attractive. Anyone interested in acquiring a share in a business or wishing to be recognized as a partner will ask for a formal structure.

Organizations, limited liability companies, or partnerships are examples of formal structures that require outlining clear rights and roles in advance. By doing so, all parties involved are aware of how the agreement will function and what their alternatives are.

Additionally, a formal business framework is also required by financial institutions before granting a loan request to businesses. In the event of a disaster, a financial institution will be better positioned to recover its loan from a formal business than a single proprietor who might not have enough investments or money to recover the financial loss.

business entity filing

Prosperous leaders are privy to the fact that in order to increase revenues and attract new clients, they need to expand. Now, these are the common methods to realize significant growth. You can do one or both, although it depends on your business.

At first glance, it might seem not very comforting. However, expansion is vital for growth, especially for the future. 

3. You Want To Manage Your Liability

For many willing to try their hand in entrepreneurship, sole proprietorship is usually the first step. It’s a business entity that’s the easiest to form and operate. However, sole proprietorship attracts a lot of risks. As the proprietor, you’ll be personally accountable for the debts and liabilities of the business.

For instance, if the company becomes bankrupt, you’ll have to pay off all unpaid debts from your savings. Additionally, as the business develops, the risks related to operating the business grow as well.

And at some point, you might not want to be liable for the obligations of the business. In such a case, a sole proprietorship might change to a corporation or a limited liability company—two business entities that provide individual protection from business undertakings.

Final Thought

Your business will also need some change over time. Regarding your business framework, the perfect thing is to choose the right structure or entity. However, it’s normal to keep things simple when you start. That’s why it’s vital to reassess the processes as the business grows and do away with what’s not working while integrating what works.

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