A lot of entrepreneurs start their businesses as sole proprietorships simply because it is simple, inexpensive and requires minimal effort to maintain. Operating as a sole proprietor, in essence, can let you get your business up and running pretty fast – without all the formalities that come with other business structures.
However, what works at the beginning can become a bad fit once the business takes off. At some point, many business owners begin to wonder whether it is time to form an LLC (or even a corporation). Here are some of the signs that it’s time for you to restructure your enterprise:
Your personal assets are at risk
One of the biggest differences between a sole proprietorship and an LLC or corporation involves personal liability. As a sole proprietor, you are your business – there is no legal difference. If you run into debt problems with your business through defaults on loans, lawsuits or some other means, your personal assets are also at risk.
A properly formed LLC or corporation can create a legal distinction between you and your business, reducing your personal financial exposure. If your business is approaching a point where it needs to take on some debt to expand, it may be wise to restructure.
You’re generating significant revenue
While there is no specific revenue threshold that automatically requires a change, increased earnings may signal that it is time to evaluate whether your current structure remains the most effective choice.
Different business structures have different tax responsibilities, management options and long-term planning opportunities. A consultation with a financial advisor can help you decide if there is more economic benefit to operating as an LLC or some other business structure.
You are hiring employees or adding partners
Whether you are hiring employees, taking on investors or adding business partners, a more formal entity structure can provide a clearer framework for ownership, management and decision-making.
Documents such as operating agreements, shareholder agreements and buy-sell agreements can help establish expectations and reduce the likelihood of disputes later. In fact, it may not be possible to attract the right people unless you change your business structure. A formal business entity may provide greater credibility and make future transactions, financing arrangements and business expansion efforts easier.
Ultimately, an LLC or corporation can provide a stronger foundation for long-term planning, including ownership transitions, business sales and succession strategies designed to protect the company’s value. Reviewing your options with an experienced business attorney can help ensure that your business structure aligns with both your current needs and your plans for the future.
