Can you change business entities

This is one of the more common business formation types due to its affordable nature and the benefits of being your own boss. If you want to exercise complete control over your business and work within a field where few liability risks are involved, incorporating as a sole proprietorship might be exactly what your startup needs.

However, keep in mind that this entity does not separate personal assets from professional ones. Because there is no tax or liability assistance in place, a sole proprietorship holds the owner completely liable for everything that happens with the business. Thinking about getting into business with a family member or friend? Explore incorporating as a partnership where you can share profits and losses together.

Here you'll be able to make decisions with the express consent of all other partners involved, but be careful—this entity holds each partner liable for the decisions, as well as actions, made within the business. If you've got big plans to expand and eventually go public with your business, a corporation might be your best formation bet. You'll be able to keep your professional and personal assets separated and establish a structure that makes it possible to issue shares and accept money from investors.

Much like corporations, LLCs also keep personal and professional assets separate in the event of unforeseen circumstances. Note that sole proprietorships and general partnerships which are not state-registered business entities can be changed to a C corporation, LLC or some other formal business entity by filing the necessary formation paperwork e.

A company's business structure has an impact on tax obligations, reporting requirements, owners' personal liability and other things. Below, I've listed some of the reasons and scenarios that may drive business owners to pursue a change in business entity type.

Sample scenario: A sole proprietor whose personal assets have no separation from those of the business decides to hire employees but is afraid of the increased liability it may mean. By forming an LLC or a C corporation, that business becomes its own independent legal entity, thus giving the owner personal liability protection. Sample scenario: Business owners that own a disregarded entity LLC are unhappy with their lofty self-employment tax burden. By electing for S corporation tax treatment or converting to a C corp , they stand to lower their personal Social Security and Medicare tax obligations.

Owners pay self-employment taxes on their wages and salaries but not on income paid to them as distributions. Sample scenario: An LLC's members are all in high individual income tax brackets, and all profits from the business flow through to the owners' personal income tax returns. Because the corporate income tax rate is lower than the individual rates the owners are paying, you decide to crunch the numbers to see if converting to a C Corporation might be more beneficial.

Profits left in the business will get taxed at the corporate rate but not at the individual level. Also, the company would have more tax deduction opportunities as a C corp. Even with the double taxation element factored in dividend income gets taxed at the corporate level and the individual shareholder level , you find that being a C corporation will result in an overall lower income tax obligation.

Sample scenario: An LLC is expanding its operations and needs to raise a significant amount of money to accomplish the initiative. Converting to a C corp and selling stock would provide a path for the company to get the funds it requires to fuel its growth. Always make sure to review and comply with local and state regulations, preferably by consulting a qualified attorney and checking the rules with your Secretary of State.

Ask a lawyer now to get the personalized guidance you need to change your business entity the right way. This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.

Lawyer must be part of our nationwide network to receive discount. Get Started. Share this. Related Guides. Legislation that governs your partnership is state-specific. You may want to you seek advice from an accountant, solicitor or lawyer before making this change. To convert from a partnership to a company, you need to dissolve your partnership and set up your company. You cannot transfer your partnership into a company. Consider the pros and cons of each structure, and decide on a business structure that best suits your business and situation.

You need to ensure your business plan reflects the new or proposed structure, and outlines the goals and objectives of your business. Visit the Australian Business Register website to find out more. You may need to look over other agreements to prepare for your business structure change.

This is particularly important in the case of companies and trusts. A change of business structure may affect the tax you have to pay or how you report your tax. The Australian Taxation Office ATO can help you understand how your business structure affects your tax and the implications of incorporating your business. If you wish to change structures and keep running the business as a sole trader, you will need to apply for a new ABN for your business and if you want to keep the same business name, you will need to transfer the business name to yourself.

Seek professional advice to help you understand what you need to transfer. Know who you need to notify when you make changes to your business structure. Find out what you need to do when restructuring your business from a sole trader to a company.