3 reasons a business may need to change its legal type

On Behalf of | May 30, 2023 | Business Formation

Those starting a new business often think very carefully about what type of legal entity they want to create. There are benefits and drawbacks to each business type. Some people will drive the most benefits from a simple sole proprietorship, while others may want to start a limited liability company (LLC) or a complex corporation.

Eventually, as the business changes over time, an owner or executive may come to the realization that the current legal type for the business no longer fully suits its needs. It is possible to file paperwork to change the legal type of a business when a different entity type would be more beneficial given current operations.

What are some of the reasons that people choose to adjust the legal type of the business they run?

They want to grow with minimal risk

What starts out as a simple sole proprietorship or partnership could grow into a very successful business. When thinking about expanding, owners and entrepreneurs often need to revisit the type of business they created to protect themselves from the financial and legal liability that comes from running a bigger company.

They want to bring in help or eliminate a partner

Perhaps someone started their business as a partnership with an investor or a family member, and they are now ready to assume full control over the organization so that their partner can retire or move on to a different project. Maybe someone started a business on their own and they now recognize that they would benefit from a partner or a board of directors helping guide company operations. Changing the business form can be a way to eliminate co-owners or to add other parties to the organization.

They want to change the function of the company

Perhaps what started out as a for-profit business model has proven to not work very well in the community. However, it has exposed a need for education or services in an adjacent niche. Someone may want to convert a for-profit business to a non-profit entity to change how their company operates. Others may want to shift a company created to provide services to instead produce products. When the function of a business will change, often the legal type of the business needs to shift as well.

The process of changing a business’s legal type can be as challenging as forming a business when first starting an organization. Having appropriate support and a long-term perspective will make it easier for someone to start or rework a business.

Contact The Firm