Has Your Business Outgrown Sole Proprietorship?

Businesses May Need Change of Structure

business structure So you’ve been operating your business as a sole proprietorship for a while, perhaps even several years, but now you’re wondering if you’ve outgrown this arrangement.

It’s not uncommon for sole proprietors to convert to another business structure as their business grows and needs change.

Your sole proprietorship was easy to set up, and you’re beholden to no one because your business isn’t really a legal entity. On the other hand, you’re personally liable for the whole thing, so your assets are at risk. You have to pay self-employment tax on your profits. And, technically, you have no business to pass along or sell if you die or want to move on.

Now you need additional expertise to develop products or manage the company, or you need more capital to expand. Bringing on one or more partners or becoming a corporation may be the answer. Or maybe you want to reduce your level of risk and you’d feel better-protected by becoming a limited liability company (LLC).

In essence, options other than sole proprietorship include:

A general partnership. Partners share the burden and the wealth, but a formal agreement is essential.
A limited liability company (LLC), also easy and flexible. You get the liability protection of a corporation, but you can sidestep onerous procedural requirements.
A corporation, which offers clear separation of personal assets, tax savings, and the best opportunities for outside investment. But you’ll face lots of formal procedures and reporting.

Whatever you choose, there will be plenty of paperwork involved. And of course there are some costs. But those are temporary – think of them as growing pains.

Is this the right time to switch your business structure?

It’s the perfect time to consult a tax professional. Here at The Tax Office Inc., we understand the nuances of all business types as well as the ramifications for your specific business, so we can help you carefully evaluate the pros and cons of moving beyond a sole proprietorship.

If you’re seriously considering a change, contact us today and let us help you make the right decision.