How to Change Your Business to a Corporation
So, you’ve decided it’s time to take your business to the next level and convert it into a full-fledged corporation. This can be a great strategic move that offers flexibility, increased capital options, and a more formalized structure.
Turning your small business into a corporation can be overwhelming, but it doesn’t have to be. Having all the right information at your fingertips is essential when taking on such an important endeavor.
Keep in mind that this formal process entails a lot of steps that you need to understand, so you can make a smooth transition and go on this exciting journey with confidence.
Business Evolution Checklist: Is It Time to Change Structures?
Expanding your business might be an exciting venture, but how do you really know when the timing is right? Here are a few examples to help you with the decision and steer you in the right direction.
Growth and Expansion
- Signs: Your business is experiencing rapid growth, and you need access to more capital to fund expansion.
- Consider Conversion If: You notice a need for additional investors, want to issue different classes of stock or plan to go public.
- Signs: Your business operations have outgrown the simplicity of an LLC structure.
- Consider Conversion If: You need a more formalized management structure with a board of directors and clear lines of authority.
- Signs: Your business has reached a point where a different tax structure would be more beneficial.
- Consider Conversion If: A corporate tax structure aligns better with your financial goals or if you’re looking to benefit from certain tax incentives available to corporations.
- Signs: You want to attract outside investors or venture capital.
- Consider Conversion If: Converting to a corporation can make your business more attractive to investors, offering them the opportunity to own shares.
- Signs: You have long-term plans for your business and want a structure that aligns with those goals.
- Consider Conversion If: A corporate structure provides the stability and versatility needed for your business’s future endeavors.
Steps for Changing Your Business to a Corporation
Step 1: Assess Your Reasons
Before you start with all the paperwork, research, and legal requirements think about the reasons why you want to change your business. Consider questions such as — Do you need more financing options, do you want a different management structure or is it something else? In addition, go through the signs we mentioned above to make an informed decision faster.
Step 2: Plan Your Conversion
Once you are sure about the decision you want to make a clear plan for the conversion process. This should include steps to dissolving your LLC, an outline of the new structure, allocation of the shares, and any possible changes to the management. With a detailed plan, you will have a clear roadmap that will make the road to success easier.
Step 3: Member Approval and Dissolution Vote
Just as you needed approval to form your LLC, you’ll need member or manager approval to convert to a corporation. Carefully review your current operating agreement for any specific provisions that might influence the conversion or dissolution, and always get a green light from everyone involved.
Step 4: Compliance Check
Depending on your location and jurisdiction you might have to fulfill different requirements. Some state laws insist on specific forms and procedures for conversion, so make sure you thoroughly research everything. This way you can be sure you are compliant with the laws and avoid any repercussions. This is also a good time to consult professionals and ensure everything is up to code.
Step 5: File Articles of Conversion and Dissolution
Once all the paperwork has been prepared you need to file the documents with the appropriate government agency. In most cases, this will include filing articles of conversion, notifying the authorities of the switch from an LLC to a corporation, and filing articles of dissolution for the LLC. Keep in mind that there will be associated filing fees during this process.
Step 6: Update Contracts and Agreements
When changing your business to a different management structure you should notify your business partners, vendors, and any relevant parties that might be affected by the changes. This will include updating the contracts, agreements, and any other legal documents that reflect the new business structure.
Step 7: Tax Considerations
Changing your business structure can often lead to different tax regulations. So, before you make the changes make sure you understand and consider all the tax implications. It’s also a good idea to consult with your tax professional who is familiar with tax consequences associated with the conversion.
Step 8: Business Licenses and Permits
The last step is updating your business licenses and permits to reflect the new change. In addition, make sure that you notify all the necessary authorities to guarantee a smooth transition in the eyes of the law.
After weighing the costs and benefits, and considering the potential advantages of changing your business to a corporation, it’s important to understand—and be prepared for—the journey before you.
You may find that some of the steps are taxing enough for you to reach out to experts in the fields of law and finance. However, when done right, making your business into a corporation can make your dream of launching or transforming a business from a small startup into something much larger, more profitable, and more sustainable achievable. Arm yourself with an understanding of what you can expect during this process, plan ahead carefully with plenty of research, review all relevant facts and laws as part of double-checking each step along the way, use resources that will save you time and money so that you don’t have to reinvent the wheel completely, and ask any questions that may arise along the way.