How to Change the Structure of a Business

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Changing a business structure is like starting a new company.
Changing a business structure is like starting a new company. (Image: business image by Clark Duffy from Fotolia.com)

When its nature of business changes, a company may consider changing its business structure. Many companies start as sole proprietorship then later transition to corporations or limited liability companies (LLCs). Companies change their business structures for a number of reasons. For example, some transition from corporations to LLCs for better tax benefits. Changing your business structure is akin to starting a new company and closing the current company. The steps for this transition can be difficult or very simple, depending on the complexity of your current company.

Opening a New Company

Consult with a trusted attorney and/or accountant to gain a full understanding of the implications for changing your business's structure. These advisers may supply recommendations for the optimal business structure for your company, given its current situation. Also personally do research to make a well-educated decision.

Deciding which structure to adopt is your company's first step.
Deciding which structure to adopt is your company's first step. (Image: decision image by bilderbox from Fotolia.com)

Register with the proper agency to create a new business. If converting to a sole proprietorship or partnership, file a fictitious name or DBA with the local county registrar of deeds. If converting to a corporation or limited liability company (LLC), file the articles of incorporation or organization with the secretary of state of a chosen home state.

You can complete registration paperwork pretty quickly.
You can complete registration paperwork pretty quickly. (Image: paperwork image by Pix by Marti from Fotolia.com)

Create governing documents for your new business structure. For new organizations filed with the state, this will include corporate by-laws or an LLC operating agreement and organizational meeting minutes.

Creating these documents for your company now will provide seamless transition.
Creating these documents for your company now will provide seamless transition. (Image: rubber stamp image by Snezana Skundric from Fotolia.com)

Acquire an Employer Identification Number (EIN) from the IRS and any other tax identification numbers required by the home state and locality for your new business. This will allow the new structure to have its own financial accounts.

You can obtain a new EIN instantly from the IRS' website.
You can obtain a new EIN instantly from the IRS' website. (Image: id form image by Alexey Klementiev from Fotolia.com)

Open a new bank account, preferably with the same bank as the current company. This continues an established banker relationship and keeps the banker informed of the company's actions.

Your company’s established relationship with a banker will ease the transition.
Your company’s established relationship with a banker will ease the transition. (Image: businessman and businesswoman shaking hands image by sumos from Fotolia.com)

Transition Old to New

Transfer assets and liabilities from you old company to the new one. This may require using existing capital to pay off legacy liabilities.

An opening balance sheet should include all your company's assets, liabilities, and equity.
An opening balance sheet should include all your company's assets, liabilities, and equity. (Image: Making a financial plan image by Allen Stoner from Fotolia.com)

Notify licensing agencies, insurance companies, suppliers, partners, customers and employees of company changes. Some of these stakeholders may require the closing of old accounts and opening of new accounts. Others may simply require an update of company name and EIN.

Your company should inform others with letters and a press release.
Your company should inform others with letters and a press release. (Image: Envelope for the letter image by Cosmic from Fotolia.com)

Close your old company. Follow all procedures required by the IRS and your state government. This requires some paperwork and time, especially when there are many employees involved.

Make sure your old company has transferred all relationships before closing.
Make sure your old company has transferred all relationships before closing. (Image: closed image by Lombok from Fotolia.com)

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