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Woodland Hills Business Law Blog

Wednesday, April 9, 2014

Changing Your Business Entity from a Sole Proprietorship

Changing Your Business Entity from a Sole Proprietorship

What does the transition entail?

There are various ways you can restructure the legal framework of your company if you wish to add a partner to your sole proprietorship, though each option has different requirements. It's possible to merely act as "partners" without any formal agreement, but that's generally not a good idea. The smart choice is to create a business entity, such as a corporation or limited liability company.
Here are a few facts and considerations to keep in mind as you restructure your company from a sole proprietorship to another business entity.

Create a Corporation With Your New Partner

To do so you would first need to decide upon a name and then, assuming that name is not already taken in your state, file articles of incorporation with your secretary of state. You would next apply for a tax identification number with the IRS, and you may have to file other documents with your state's department of revenue or other agencies. It's best to seek the advice of a tax attorney and/or your CPA as to whether your corporation should elect to be taxed as what is known as an "S-Corporation." If so, elect that option on the tax identification number application form. The company should have bylaws, initial minutes and a buy-sell agreement.

Form the Entity as a Limited Liability Company (LLC)

This is also done through your secretary of state and the steps are similar to what must be done for a corporation. You would still apply for a tax ID number in the same manner. The LLC will have options as to how it is to be taxed. It also could elect to be taxed the same as an S-Corporation, or it could elect to be taxed like a partnership. These are important factors and you should seek the advice of a tax attorney and/or CPA.

This is an important step in your business and taking on another owner carries with it a number of legal issues that must be addressed in order to proceed. Review the above information with your attorney so they may properly advise you on a course of action.

Changing Your Business Structure

What about a buy-sell agreement? Also known as a shareholders agreement, this is a contract between you and your partner that would address the right of one of you to buy out the other upon the happening of certain events. Those might include disability, death, divorce, and a number of other events. Keep in mind that you should transfer ownership of at least some assets from your sole proprietorship to one of the aforementioned entities when restructuring your business. 


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