Are you a business owner who started as a sole proprietor? Is this structure still working for you, or are there inefficiencies?
Did you know you can easily change your business structure to a better one that suits your needs? Businesses change their structures mainly to accommodate growth and eliminate any inefficiencies. Are you one such business? How do you switch your business structure? Here’s a step-by-step guide to the process:
Understand Each Business Structure
Before making any switch, you must understand the different business structures and their key differences. You also want to identify the best business structure that suits your business. Common structures are sole proprietorships, partnerships, Limited Liability Companies (LLCs,) and corporations.
Under each, learn more about the merits, demerits, fees, liabilities, and operational continuities. You also want to know the formation process of each. Seek the best LLC formation service or one for your preferred structure for guidance. The insight enables you to make a conscious decision.
Seek Advice From A Tax Professional
Taxes are a significant consideration in choosing your business structure. They directly impact your budget and cash flow. Therefore, you must consider the tax implication of any change you make.
It’d help to get guidance from a tax professional, like a lawyer or a Certified Public Accountant (CPA.) They will be able to explain the tax implications of each business structure. With their expertise, they can also study your business finances and advise the best business structure to adopt. The aim is to avoid choosing a structure that drains your business finances.
Ensure you work with a trusted tax professional since you’ll expose your business finances to them.
Notify The HMRC
Her Majesty’s Revenue and Customs (HMRC) is the body that’s mandated to collect and deal with everything taxes in the United Kingdom. When forming a business structure, it allocates you an Employee Identification Number (EIN), your business identifier. You’ll use this number when paying business taxes.
HMRC will issue an EIN containing your business profile, including how you’ll run it. Therefore, a change in business structure requires a change in the EIN. Promptly inform the HMRC of the change you’re making. The body will give you a new EIN with the updated data, including tax obligations.
Notify Other Regulatory Bodies
As you registered for your current business structure, there are various bodies under which you sent your documents. A common body is the state or federal government; it all depends on your location. These are the bodies you need to notify about the changes.
The bodies are often responsible for licenses and permit acquiring and payments. Business structures require different permits and licenses. Therefore, a change might warrant a new system.
On notifying these bodies, they’ll update your business data and group you under the right and new category. The grouping guides you on the licenses you need to acquire and the payments you need to make, including their frequency. You want to avoid falling on the wrong side of the law.
Notify The Affected Parties
Your current stakeholders must be on board with switching to a new business structure. Are they part of the process? Investors will be able to decide whether or not the new structure suits them. The shareholders may alter their share contributions accordingly. With everyone in the loop, you avoid legal consequences from these parties.
As you notify these shareholders, ensure you do it formally. Consider setting up a meeting and recording the minutes of the entire meeting. The minutes act as a written document of the whole process, should the need arise.
Acknowledging that customers are also an essential part of your business is important. Therefore, inform them as well about the changes.
Register Your Business
Once you’ve verified all the data, chosen your ideal business structure, and notified all the relevant stakeholders, it’s time to register your business afresh. The process is similar to when you previously registered your business. The main difference arises with the paperwork you must submit.
Suppose you want to register a partnership. You must include a partnership agreement depicting the rules and management structure. A partnership return is also essential; it details how you’ll share profits and losses as business partners. Sometimes, the state might require you to have a nominated partner. This partner will ensure you adhere to all the laws and regulations without fail, e.g., payment of taxes.
Switching business structures is relatively easier than you’d have imagined. The discussion above ascertains this. The process mainly involves choosing the ideal new business structure and adhering to all the laws surrounding it. The discussion details these with a guide. Highly consider implementing it as you switch your business structure.