As businesses grow, business owners may need to consider changes in their legal structure. Whether that be more liability protection, the addition of partners, or a more ideal tax situation, changing a business entity is a common process. However, this legal process may be entirely foreign to new business owners or too tedious for veterans. As such, it is always important to consult legal counsel during this process. This article will help walk business owners through the entity conversion process.
Choose the Right Entity
Before you can convert your business entity, you need to choose the right one for your needs. Depending on your business’ structure or goals, you may choose to convert from a sole proprietorship to an LLC or from an LLC to a corporation. L4SB’s Business Entity Selector Tool is a great place to start. This tool evaluates each option to help you choose the one best suited for your business.
File the Right Forms
Once you’ve chosen your new entity, you’ll need to file the appropriate paperwork with your state’s Secretary of State. This will likely include Articles of Conversion and other forms specific to your new entity type. Filing these forms can be complex, particularly if you’re converting from one type of entity to another. Hiring a lawyer to file tedious paperwork and negotiate with the respective governmental entities can save valuable time and ensure legal compliance.
Update Contracts and Agreements
Switching entities can impact your existing contracts and agreements, including lease agreements, employment contracts, and insurance policies. Lawyers ensure that all necessary updates are made and help you negotiate any changes with third-party vendors or partners.
Address Tax Implications
Finally, changing your business entity can have significant tax implications. For example, converting from a sole proprietorship to an LLC can change how your business is taxed and may result in different deductions or credits. Consulting with a tax professional and working with a lawyer can help ensure that you’re making the best decisions for your business’s financial health.
Changing your business entity can be a complex process, but it’s often necessary as your business evolves and grows. Working with a lawyer to manage the legal implications of converting entities can help ensure a smooth transition and protect your business’s interests. Whether you’re considering a change now or in the future, reach out to a legal professional to discuss your options and get the support you need.