Many businesses change their entity type as they grow and their needs change. For example, a sole proprietorship may choose to become an LLC to protect the owner’s personal assets from business liabilities, or a partnership may choose to incorporate to take advantage of tax benefits.
The process of changing your business entity will vary depending on your current entity type and the new entity you want to become. Here are some things to consider:
- Research and compare entity types: Before making any changes, it’s important to research and compare the pros and cons of each entity type. Consider factors such as liability protection, taxation, management structure, and compliance requirements.
- Consult with professionals: It’s essential to consult with professionals, such as a lawyer and your CPA, to understand the legal and financial implications of changing your business entity. They can also help you with the necessary paperwork and filings.
- Notify the appropriate government agencies: Depending on your state and entity type, you may need to notify the appropriate government agencies, such as the Secretary of State’s office, of your entity change. You may also need to obtain new licenses and permits.
- Update contracts and agreements: You’ll need to update any contracts, agreements, and other legal documents to reflect your new entity type. This includes leases, loans, and insurance policies.
- Transfer assets and liabilities: If you’re changing your entity type, you’ll need to transfer your assets and liabilities to the new entity. This may include transferring bank accounts, leases, and contracts.
- Plan for tax implications: Changing your entity type can have significant tax implications.
If you change from a sole proprietorship to an LLC, you’ll need to file a new tax classification election form with the IRS. It’s essential to plan for these tax implications and work with your CPA to ensure that you are in compliance.
Changing your business entity is possible, but it’s essential to you do your research, consult with professionals, and plan carefully. It’s also important to consider the legal and financial implications of changing your entity type, such as liability protection and tax implications. With careful planning and execution, changing your business entity can help your business grow and thrive. If you have questions or need help, contact the CPA professionals at Intentional Accounting, we can help answer your questions, plan for any tax implications, and process the necessary paperwork.