The new year brings fresh starts, renewed energy, and the perfect opportunity to evaluate whether your business structure still aligns with your goals. If you started your business as a sole proprietor or LLC years ago, your company has likely evolved. Maybe you’ve added employees, increased revenue, expanded into new markets, or taken on business partners. These changes might mean your original business structure no longer serves you well.
Many business owners operate under the misconception that once they choose a business structure, they’re locked in forever. That’s simply not true. In fact, changing your business entity can unlock significant tax savings, provide better liability protection, and position your company for growth.
In this article, you’ll learn when and why to consider changing your business structure, the legal and tax implications of different entities, and how to make the transition smoothly with proper planning.
Understanding Your Business Structure Options
Before you can determine if a change makes sense, you’ll want to understand what options are available and how they differ. Each business structure offers distinct advantages and disadvantages depending on your situation, goals, and growth stage.
Sole Proprietorship is the simplest structure where you and your business are legally the same entity. While easy to set up and maintain, it offers no liability protection. Your personal assets remain vulnerable to business debts and lawsuits.
Limited Liability Company (LLC) can provide liability protection by separating your personal assets from your business. It’s flexible, relatively easy to maintain, and offers pass-through taxation where business profits flow directly to your personal tax return. Many small businesses start here because it balances protection with simplicity.
S Corporation (S-Corp) is a tax designation that can apply to your LLC or corporation. It allows you to split your income between salary and distributions, potentially saving thousands in self-employment taxes. However, S-Corps come with more administrative requirements, including reasonable salary mandates, payroll processing, and additional tax filings.
C Corporation (C-Corp) is a separate legal entity that pays its own taxes. While this creates double taxation on profits, C-Corps offer advantages for businesses seeking venture capital, planning significant growth, or wanting to retain earnings in the company.
Understanding these options helps you recognize when your current structure no longer fits your business reality. The structure that worked when you launched may now be costing you money or limiting your growth potential.
Signs It’s Time to Change Your Business Structure
How do you know when it’s time to make a change? Several clear indicators suggest your business has outgrown its current structure or that a different entity would better serve your goals.
Your self-employment taxes are eating your profits. If you’re operating as a sole proprietor or LLC taxed as a partnership, you’re paying self-employment tax on all your business profits. Once your business consistently generates significant profits, an S-Corp election could save you thousands by allowing you to take part of your income as distributions rather than salary.
You’re scaling up and need to attract investors. Most investors prefer investing in C-Corps because of the flexibility in stock classes and ownership structures. If you’re planning to seek venture capital, you’ll likely need to convert to a C-Corp. Making this transition early in the year allows you to present your business properly structured when you start investor conversations.
You’ve taken on partners or plan to. If you started as a sole proprietor but now have business partners, you need a more formal structure that clearly defines ownership, profit distribution, and decision-making authority. An LLC with a comprehensive operating agreement or a corporation with shareholder agreements provides the legal framework to prevent costly disputes.
Your liability risk has increased significantly. As your business grows, so does your exposure to potential lawsuits. If you’re still operating as a sole proprietor, every business debt or lawsuit threatens your personal savings, home, and other assets. Moving to an LLC or corporation creates a legal barrier between your business and personal assets.
You’re planning for exit or succession. If you’re thinking about selling your business or transitioning it to family members, the right entity structure makes these plans much smoother. Corporations with well-organized stock make transfers cleaner, while certain trust structures can be integrated with business entities to facilitate succession planning.
If any of these situations sound familiar, January is your opportunity to make strategic changes before you’re deep into another tax year.
The Legal and Tax Implications of Changing Your Structure
Changing your business structure isn’t as simple as checking a different box on a form. The transition involves legal steps, tax considerations, and timing that require careful planning to avoid costly mistakes. Here’s what you need to know:
Tax implications vary by transition type. Converting from a sole proprietorship to an LLC typically involves minimal tax consequences. However, converting from an LLC to a corporation or changing from an S-Corp to a C-Corp can trigger tax events. This is why working with advisors who understand both the legal and tax sides is critical.
State filing requirements differ. Each state has its own rules and fees for forming, converting, or dissolving business entities. You’ll need to file articles of incorporation or organization, potentially publish notices, and pay various fees. Understanding your state’s requirements prevents delays and compliance issues.
Contracts and agreements need updating. When you change your business structure, existing contracts, leases, licenses, and agreements may need to be amended or transferred to the new entity. Your business bank accounts, credit cards, and financing arrangements will need updating.
Timing determines your effective date. For most structure changes to take effect at the start of the tax year, you need to complete the process by specific deadlines. Some elections have strict timelines, and missing them means waiting another full year.
This complexity is exactly why January planning is so valuable. When you start the process early in the year, you have time to navigate the legal requirements, understand the tax implications, and implement the change properly.
What to Do Now
Don’t let another year pass with a business structure that doesn’t serve you. The strategic planning you do in January can result in significant tax savings, better liability protection, and a stronger foundation for growth throughout the year.
As your trusted LIFTed Business Advisor and attorney, I help business owners navigate these critical decisions by evaluating how your business structure integrates with your legal protections, insurance coverage, financial goals, and tax strategy. When you work with me, we start with a LIFT Business Breakthrough™ Session where I’ll review your current business foundations across all four areas and identify whether your business structure is helping or hurting you. Together, we’ll determine if a structure change makes sense for your situation, understand the complete implications, and create a plan to implement it properly.
Book a complimentary 15-minute discovery call with me here to get started.
This article is a service of a Personal Family Lawyer® Firm and LIFTed Advisors® Attorney. I offer a complete spectrum of legal services for businesses and can help you make the wisest choices with your business throughout life and in the event of your death. I also offer a LIFT Business Breakthrough Session, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule.
The content is sourced from Personal Family Lawyer® for use by Personal Family Lawyer firms, a source believed to be providing accurate information. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you are seeking legal advice specific to your needs, such advice services must be obtained on your own, separate from this educational material.