How to Choose the Right Business Entity When Restructuring a Business

For business owners, putting a new business structure in place can be an exciting but challenging endeavor. One important decision you will need to make during this process involves choosing the right business entity for your restructured company. The type of entity you select will have significant implications on various aspects of your business, including taxation, liability protection, and management structure. Therefore, it is crucial to carefully consider all the options available before making your decision.

The Importance of Choosing the Right Business Entity

Selecting the appropriate business entity is critical because it determines how your company will be taxed and regulated. It also impacts personal liability exposure as well as governance and ownership structures. Making an informed choice can help safeguard your assets against potential legal risks while maximizing tax benefits.

Here are some key points to consider when selecting a business entity:

1. Tax Implications: 

Different types of entities are subject to different tax regulations at the federal and state levels. It is essential to understand these tax implications before deciding on a specific structure for your business.

2. Liability Protection: 

Some entities offer limited liability protection that shields the owner’s personal assets from being seized as payment in situations where the company may face financial issues or lawsuits.

3. Business Flexibility: 

The future growth plans for your business should play a role in determining which entity best suits your needs. The structure you choose may affect expansion opportunities or access to external financing sources.

4. Ownership and Management Structure:

The type of entity you choose can significantly impact how ownership is shared among partners or shareholders. It will also determine the roles and responsibilities of individuals involved in running the company.

5. Governance Structure:

A well-defined governance framework is crucial for the smooth functioning of any business. Different entities come with specific governance structures, such as boards of directors or managing members.

Types of Business Entities to Consider

There are several different options available for restructuring your business, including:

1. Sole Proprietorship: 

A sole proprietorship is a simple form of business where there is no legal distinction between the owner and the business entity. This structure offers complete control over decision-making but lacks liability protection.

2. Partnership: 

If your restructured business involves multiple owners sharing management responsibilities, a partnership may be an option to consider. General partnerships offer shared decision-making authority, while limited partnerships provide some liability protection for certain partners.

3. Limited Liability Company (LLC):

An LLC combines elements from both corporations and partnerships. It offers personal liability protection while allowing flexibility in terms of taxation.

4. Corporation:

A corporation will provide liability protection for shareholders, but it will involve more extensive compliance requirements compared to other entities. Depending on whether a business is structured as an S-corporation or C-corporation, double taxation may apply, or taxes may be “passed through” to the shareholders.

How to Evaluate Your Options When Selecting a Business Entity

Choosing the right business entity is a complex decision that depends on various factors specific to your restructured company. Here are some things to keep in mind as you consider your options:

1. Evaluate Your Business Goals: 

It is important to understand your long-term objectives and consider the type of business entity that aligns with those goals. Consider factors such as growth plans, potential funding sources, and exit strategies when making this assessment.

2. Analyze Tax Implications: 

A business law attorney can help you understand the tax advantages or consequences of different entities and provide guidance on which structure offers the most beneficial options for your business.

3. Weigh Liabilities:

It is important to carefully consider the potential risks and liabilities associated with each type of entity—both for yourself personally and for any co-owners involved in your restructured business.

4. Seek Professional Advice: 

If you are unsure about which business entity is best suited for restructuring your company, it is vital to consult an experienced attorney who can help you evaluate your options and ensure that you follow the correct procedures as you establish a new entity.

Contact Our DuPage County Business Formation Lawyer

Making informed decisions during times of change is crucial for every successful business. If
you are considering restructuring, or if you are starting a new venture, the Gierach Law Firm can provide the legal help you need. We will advise you on the best steps to take to achieve your goals, and we will make sure all legal concerns will be addressed correctly. Contact our Naperville business law attorney today at 630-756-1160 to schedule a consultation.

Sources:

https://www.sba.gov/business-guide/launch-your-business/choose-business-structure

https://www.nerdwallet.com/article/small-business/business-entity

https://www.businessnewsdaily.com/8163-choose-legal-business-structure.html