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3 signs it may be time to change a business’s legal structure

On Behalf of | Dec 2, 2023 | Business-Employment

During the business formation process, the average entrepreneur spends a lot of time thinking about what structure would be best for their company. Some people want to start corporations, while others would prefer to keep the arrangements as simple as possible.

Whatever decisions someone makes, they may eventually question whether it was the right choice for the company. Some people may reach the conclusion that their business should no longer be a sole proprietorship or a simple partnership. They may then need to change how they structured the company.

What are some of the signs that an adjustment to the business’s type is a necessary move?

Ownership interests have changed

Perhaps someone started a business with a friend who has decided to retire or take a new job elsewhere. Maybe they started the business alone but now recognize that they would benefit from having a partner. Someone who wants to add new owners or remove existing ones may determine that changing the type of business they run is also necessary.

Business functions have changed

The idea behind a business can evolve as an entrepreneur discovers what generates revenue and what does not. Someone significantly changing what the business does may need to adjust the type of business they run. They may require more investors or more liability protection than their current business form provides.

The business has grown significantly

Many people start their businesses informally or try to keep them small when initially operating the company. It is only after they achieve success that they begin to worry about liability that could endanger their personal property or the need for additional executive support. Someone who previously operated a sole proprietorship may want to create a limited liability company (LLC) or corporation when they decide to expand into new markets.

The process of changing a business type can be a challenge. Business owners need to file paperwork with the state and possibly also the federal government. Contracts and insurance policies likely require revisions as well. Recognizing when to change a business’s type is only the first step in what is often a difficult process that frequently benefits from legal guidance.