Why You Should Upgrade Your Sole Proprietorship Business Structure

In many instances, entrepreneurs raise questions about the best business structure for their small business. For many, the basic business structure is a sole proprietorship. In the US, for example, over 70 percent of small businesses are sole proprietorships. This is according to data from SBA. A sole proprietorship business structure is the best for its simplicity. It is also easy and cheap to set up a sole proprietorship. Nevertheless, there is no distinction between an entrepreneur and the business with this type of entity. This implies that an entrepreneur is liable to liability litigations.

As a business grows and profit margins of the business grow huge, it is wise to think about changing the business structure. It would be all right to seek help and talk to a financial expert or a certified public accountant. Get more information about forming a limited liability company or incorporating could be the best option. This move could save your company money, limit your liability and help the business grow.  Below are the reasons why you should upgrade your sole proprietorship.

Liability

The first reason why entrepreneurs upgrade their business structure is to reduce personal liability. That is done by legally separating personal and business assets. Without limited liability, personal assets may be collected to pay business debts. Afterward, this can affect personal financial stability, which in turn can result in unnecessary constraints.  In the same vein, a top concern with a partnership entity is that you have unlimited liability. Each partner shares responsibility for all business losses and debts. Partners are liable even if the losses are sustained due to actions or decisions made by another partner.

After changing the business structure to an LLC or corporation, the business will have its own assets. Notably, personal assets cannot be used to clear the debts of the business. No creditor is allowed to collect personal assets to settles business debts. It is possible to incorporate a business even as a single proprietor. For example, if you are a professional service provider such as a consultant, contractor or doctor – you can set up a company as a separate legal entity. You can register the business as a single-member LLC.

Taxes

According to the IRS, each business structure handles taxes differently. For instance, taxes are simpler for a sole proprietor than with other structures. Nonetheless, a sole proprietor is taxed on all business profits. On the other hand, a C Corp business structure pays a corporate income tax on all profits. These profits are then taxed again at the individual’s tax rate when they are paid to shareholders as dividends. Even though profits are double taxed, the ability to split the profits between the business and entrepreneur as a shareholder lowers the tax rate.

For an S corp, the business pays an entrepreneur a reasonable salary and even takes care of the Social Security and Medicare taxes. Consequently, the remaining part is shared among shareholders. Moreover, an entrepreneur pays individual income taxes on his or her portion of the shared profit. This option may save an entrepreneur some money on personal social security and Medicare taxes. Most notably, you can decide whether you want to be taxed as a sole proprietor, C Corp, or S Corp if you have an LLC.

Changes in ownership

Legally, a change of ownership of a business necessitates a change of a few things. An entrepreneur can take advantage of the opportunity to change ownership and change the business structure. For instance, a sole proprietorship can change the business structure to a partnership after taking on a business partner. In case of a partnership, one partner may decide to buy out another. The ideal thing to do in this case is to change into a sole proprietorship or a single member LLC. A family business can also be changed to incorporate multiple people as shareholders. In this case, the business structure can change to an LLC or a corporation.

Financing

It is worth to note that the financing options of a sole proprietorship are limited. You may need a healthy personal credit score to qualify for a business credit card, loan, or line of credit. If you personally guarantee another person for credit, you will be required to be responsible for him or her. If you are unable, the creditor will pass on the burden to your business. it gets worse when n entrepreneur has to put collateral such as personal house against a debt.

However, it is possible to avoid personal liability for the financing solutions an entrepreneur receives. That is achievable if the business structure is an LLC. In case an entrepreneur is willing to share the ownership of a company, they should form a partnership and accept investors into the business. Of course, this transaction will be in exchange for shares of the business. A C Corp is the best option if an entrepreneur wants to bring in investors such as angel investors or venture capital firm.

If you would want to get assistance in changing the structure of a business, get in touch with us. Our experts will take you through every stage.

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