Is It Time To Change Your Company's Business Structure?

In business, very few things are constant. As the nature of your business changes, so can its business structure. Because what may have worked for your business during the first few years of its existence may not be optimal for you now.

If you’re thinking about converting your company from one business structure to another, there are a few things to keep in mind. The procedures themselves are not necessarily difficult or complex; but will typically involve some legal steps, such as a merger or dissolution/creation of a new entity. As expected, there can be significant tax implications involved with these moves and it’s always best to seek the advice of an accountant or tax advisor to determine what’s best for your business.

Here are some of the common scenarios when it comes to business conversions:

Scenario 1: Change an LLC to a corporation
Maybe when you started your company, you didn’t have any outside investors and didn’t have a need for a stock option plan. You just wanted a low-frills way to protect your personal assets and track ownership. But your business grew and it’s time to consider seeking VC funding. Before you bring in outside investors, you’ll need to switch your LLC to a C Corporation (it can get messy to try to convert your business after involving others in the ownership).

The specific steps involved to convert from an LLC to a corporation will depend on the corporate laws in whatever state your LLC is registered. In many cases, you’ll be creating a new C Corp and then making the original LLC a subsidiary of the new C Corp. This is a relatively standard process, and your attorney or online legal filing service should be quite familiar with the steps needed. Most startups and businesses find that this conversion is the simplest part of their Series A round or other financing.

Scenario 2: Change a C Corporation to an S Corp
Tired of double taxation? Has your tax advisor mentioned you could lower your taxes with the S-Corp’s pass-through tax treatment? You’re not alone. Many small businesses find the C Corporation too cumbersome and too expensive for their needs. Fortunately, converting a C Corp to an S Corp is one of the easiest conversions around -- it can be done with a single tax form.

If you have a C Corporation, you can elect ‘S Corporation Status’ by filing IRS Form 2553 no more than 75 days from the date of incorporation, or no more than 75 days from the start of the current tax year. If your corporation existed on January 1 (and you’re a calendar-year tax payer), then you’ll need to file IRS Form 2553 by March 15 to receive S Corp treatment for the current tax year.

Bear in mind that the IRS places certain restrictions on S-Corps, such as all shareholders in an S Corp must be individuals (not LLCs or partnerships) and legal residents of the United States.

Scenario 3: Change a C Corporation to an LLC
If you’re not a U.S. citizen but still want to take advantage of pass-through taxation, you’ll need to change your corporation into an LLC. Most states don't allow C corporations to restructure as an LLC, which means you’ll need to form an LLC and dissolve the C Corporation. Just like with changing from an LLC to C Corporation, this is a common process that your attorney or online legal filing service can guide you through with relative ease.

Remember that it’s always possible to convert your business structure if your circumstances change. There’s no reason to stick with a structure that simply doesn’t work for your business and finances any more.

Nellie Akalp is the CEO of CorpNet.com, an online legal document filing service. Find out more about her, get exclusive CorpNet.com discounts, and great giveaways on the CorpNet.com Facebook page Facebook.com/CorpNet