Business Conversions Explained
When a business grows, in some cases, they don’t just get bigger – they also change classifications. Moving from one business category to another is called business conversions, and this is when business owners should consider conversion for their operations.
Corporate Structure
Business registration filing is required for every business. It identifies the type of business it is going to be, the name of the business, and the business organizational style. Businesses can be classified by organizational styles such as a sole proprietorship, partnership, limited liability company, or corporation. Each business structure has its rules, regulations, and, most importantly, tax responsibilities to comply with.
Time To Change
There are many reasons why a business owner may consider business conversions. If an owner operated sole proprietorship is started as a home-based business, but it eventually grows into an operation requiring employees, remaining a sole proprietorship becomes more complicated. It can leave the business legally and financially more vulnerable if anything goes wrong.
Sole proprietorships are simpler, but they don’t work for everyone. With this type of business, the state considers the owner’s personal and business finances one in the same. If any debt, penalties, or fines occur within the business, the owner’s personal savings may be in jeopardy.
Converting Your Business
Business conversion to an LLC normally occurs under these circumstances:
Business Owners Wish To Hire
Once a business hires full-time, permanent employees, an LLC’s tax laws and regulations protect the business owner better than a sole proprietorship.
Working With Partners
If a business wishes to bring on additional partners with a stake in the business, an LLC is a good way to protect everyone’s rights and prevent business disputes with a carefully documented operating agreement.
Seeking Investment
If a business owner is looking for investments of $500,000 or less for the business, an LLC is a good corporate structure that protects both the owner and investors.
Better Taxation
With a corporation, the business’s profits are federally taxed in addition to the personal taxes you pay. To avoid being double taxed, an LLC is considered a “pass-through entity.” This means the profits and losses are reported on your personal taxes only, and the business doesn’t have to pay additional federal taxes.
A Big Step
Business conversion is complex with rules, regulations, application forms, and registration as well as administrative fees that must be paid. Fortunately, professional help assists growing businesses in making a smooth, successful business conversions. Whether growing from a sole proprietorship to an LLC, or downsizing from a corporation to an LLC, help is available to ensure every step is done correctly for any state and situation.