Financial Briefs

When you started your business, you had to choose one of several business entities: a sole proprietorship, partnership, limited liability company (LLC), "S" corporation, or "C" corporation. You and your accountant likely weighed several factors, including: 

After your business has been up and running for a while, it may be time to revisit your decision. As essential as it is to start with the right legal structure for your company, it’s also important to make sure it’s still the best one as your business grows and changes. Shifts in tax law or the business environment could also signal it’s time for something new.

No doubt you tried to anticipate how your business would develop, but there are bound to be surprises, and the business form that served you well five years ago may be inadequate today. Consider two painters who pooled their savings to open a paint store as a general partnership. They couldn’t have guessed they’d now have 15 stores in multiple states. In order to limit personal liability, it may be time for them to switch to a corporate form or an LLC. But they’ll also need to consider how those or other entities would fare under the laws of the various states in which they now operate.

For example, several years ago, when LLCs first became popular, this business structure was affordable and flexible. Since then, though, many states and local governments have heaped taxes and fees on LLCs, making them much less appealing for smaller businesses operating in those locales. Fortunately, switching out of an LLC tends to be straightforward.

Your tax and legal advisors can keep you abreast of changing rules and strategies you might use to your advantage. In some cases, you will have no choice but to adopt a new business structure. For example:

While it may be relatively easy to terminate one business entity and form another, any such move is likely to have tax ramifications and other sometimes unintended consequences. So make sure to get expert help.