In today’s economic climate, Bay Area business owners are often interested in maximizing their tax and liability benefits that their business structure affords them. However, as their business grows or their needs change, so too will the need to assess if a change of business type makes sense. Consult with an experienced business attorney to create the best possible plan for you and your business.

Reasons to Change Your Business Type

One of the most common reasons that business owners decide to change the type of business they operate is to enhance their liability protection. Many small businesses begin as sole proprietors, but decide at some point to reduce their personal liability by forming a business entity that can offer some liability protection, such as an LLC or corporation.

Another reason a business may change their organization type is tax implications. For example, a pass-through entity (a business that does not pay income tax) may consider changing into a corporation. The owners of a pass-through entity, which can include sole proprietorships, partnerships, and LLCs, must pay taxes on the total net income of their business through their personal tax returns. However, corporations may retain some of their income within the business, which serves to lower the tax obligations of the organization. Experienced business attorneys can help business owners navigate these complex situations.

As a business expands and there becomes a need to hire employees, this is also a time to consider changing the type of business entity you operate. Having employees means an increased liability and complexity for the business. In addition, changes in ownership may necessitate a change of entity, such as when a sole proprietor wants to enlist a second owner for the business.

Changes for a Sole Proprietorship

When changing from a sole proprietorship to a partnership or limited liability corporation (LLC), the business owner must register as an LLC or partnership with the state in which it is doing business. For Bay Area business owners, this means filing with the California Secretary of State’s office. This process is similar for business owners who want to change their sole proprietorship or partnership into a regular corporation.

When planning to change from a sole proprietorship to an S corporation (a special type of corporation that includes unique tax advantages), the business owner must first file for formation as a regular C corporation. Then, the business must file a request to the Internal Revenue Service (IRS) and elect an S corporation designation.

Tax Changes for a Limited Liability Company

Limited liability companies (LLCs) are a state entity, and for income tax purposes these companies are taxed as either a sole proprietorship or partnership depending on the number of owners within the company. However, there may exist situations in which a business owner will want their LLC to be taxed as a corporation or S corporation, while maintaining the LLC structure and management. The process involves filing either IRS Form 8832 for a regular corporation or IRS Form 2553 for taxation as an S corporation.

Professional Legal Counsel in the Bay Area

For years, the attorneys at Coepio Legal have been helping Bay Area business owners plan for dynamic ways to organize their business.