A Legacy of Experience

2 signs it may be time to change a business’s legal structure

On Behalf of | Jul 21, 2023 | Business and Corporate |

Starting a business or taking one over often requires a lot of research and invested time. Entrepreneurs may carefully consider the implications of different business entities when deciding how to structure their companies when they are forming their companies. After all, the type of business that someone operates influences everything from the liability of the owner for business failure to the tax obligations on any revenue the company generates.

Although it is common practice to select a business type based on both immediate needs when beginning a company and long-term plans for the business, sometimes the entity type that an entrepreneur chooses during the startup stage is not the best option after some time has passed. When might it be time to revisit and possibly revise the legal type for a company?

When a business grows more than expected

Unanticipated levels of success are a pleasant surprise, especially when compared with catastrophic organizational failure. However, growing pains can stress a company financially or leave its owner in a very legally-vulnerable position. Especially when someone runs a company as a sole proprietorship, rapid growth might mean more exposure and liability than the owner would prefer. Changing the business type can diminish personal liability and possibly bring on additional support in the form of a corporate board or partner who can help manage the thriving organization.

When a plan for the business evolves

Perhaps what started as a simple restaurant concept has since developed into an entertainment venue that offers escape room experiences. Maybe the retail aspects of a business never take off, but there is plenty of demand for the company’s repair services. Sometimes, the vision that an entrepreneur has when starting a company does not align with what the local community actually desires. As they begin to adapt their business model and plan to reflect what works, they may recognize that their current legal type does not properly protect them based on the risks of the changing company.

Rather than dissolving the organization to start from scratch, it may be possible to file amended paperwork with the state to alter the existing model without closing one business and starting a new one. Complicated business adjustments, like changing a legal entity type, are often a challenge, as mistakes might lead to increased liability and other challenges, like unrecognized and unpaid tax obligations.

Following certain steps can be crucial for the protection of a business and an entrepreneur alike when someone decides that it is time to update the type of business that they run. Seeking legal guidance can be a good place to start.