Most Popular Reasons for Changing Your Corporate Structure
Are you a proprietorship, a corporation, or a partnership? Should you be something else? Is there a better corporate structure for your business? Here’s a list of top reasons people go through the painful processes of changing their corporate structure…
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Are you a proprietorship, a corporation, or a partnership? Should you be something else? Is there a better corporate structure for your business? Here’s a list of top reasons people go through the painful processes of changing their corporate structure.
- Legal restrictions
There are legal restrictions among each of the 3 structures.
- Liabilities assumed
Liabilities assumed by a sole proprietorship are sole, while a partnership is the owners, and a corporation is the general owner and the other owners as far as their contribution is concerned.
- Type of business operation
The business may be looking to expand and need a different corporate structure.
- Earnings distribution
Sole proprietorships gain all earnings by themselves. In a partnership, earnings are spread throughout the partners; in a corporation, earnings go to the business and can be dispersed from there.
- Capital needs
If a company starts off from a sole proprietorship, the money comes from the person or from a loan. A partnership can have multiple owners who contribute to the capital of the company. In a corporation, there are multiple ways to gain capital: debt and equity financing and common and preferred stock.
- Number of employees
In a sole proprietorship, it may be hard to control all the employees. Changing your structure to a partnership can allow for others to handle employees.
- Tax advantages or disadvantages
In a sole proprietorship, the individual pays the taxes; however, in a partnership and in a corporation, either the profits or the losses are split among the owners.
- Length of business operation
A sole proprietorship can be transferred from the owner only if he does so himself. In a partnership, a partner is unable to transfer her portion of her partnership to another without the authority of the other partners. In a corporation, the shareholders vote to dissolve the business unless it is decided by a court.
Source: Small Business Administration (https://www.sba.gov/).