When should you change your business structure?
If your company is steadily growing or suddenly needs to expand, you may want to consider changing the structure of your business from a sole proprietorship or a partnership to a Limited Company. Very often this proves to be a smart move at the right time and well worth the effort and investment.
Typically, a Limited Company is an “LLC” (Limited Liability Company) in the US, or a “Ltd.” in the UK. Your particular country may have a different acronym, but there are benefits to you and to your investors that make this business structure worth considering.
Sole proprietorships and partnerships work well up to a point, especially while a company is small, but they have inherent risks to the owner or partners. Most critical is the fact that the business owner(s) are liable for any debt should the company default or go under. This means that their personal bank accounts, assets, homes and properties can be seized to satisfy the debt. There is absolutely no protection afforded in this type of company structure. As far as shareholder interest options, these are also extremely limited.
Because of this, most expanding businesses opt to become limited companies. If you start out as a sole proprietorship or partnership, you are not stuck with that set-up forever. You can switch to a business structure that better fits where your company is in its growth and potential.
Limited Companies offer quite a bit a flexibility as well as financial protection. Within the LLC/Ltd. structure, new shareholders can be admitted by selling membership interests, including minority interests—all of which can raise new capital for your company. Plus, shareholders are relieved to know that they are never responsible for any company debts. Moreover, the Limited Company structure protects you as an owner or partner from the risks of bankruptcy because your personal property and assets are kept absolutely separate from the company’s.
Limited companies also provide other perks: Business owners and managers (renamed “shareholders” and “directors”, respectively) now have clearly defined functions and responsibilities within the company. In sole proprietorships and partnerships, the CEO, VIPs and managers must wear multiple hats. These day-to-day overlaps frequently muddy the waters—especially if the company is growing quickly. The fine lines between financial and job responsibilities can become blurred. This makes your investors nervous because it is no longer clear who is accountable to whom for what.
Switching your company’s structure to an LLC or Ltd. helps to put the minds of “outside shareholders” and other investors at ease because it assures them that their investment is protected. Under the limited liability structure, they know that their invested funds are never deposited into personal accounts and that the company’s annual accounts can be freely audited at any time.
When should you switch to an LLC or Ltd.?
- Whenever you feel that either you or your shareholders need financial protection
- When you are concerned that the lines of responsibility within your company are becoming blurred, or
- When you want freedom to expand your investor base to include more investors.
Evaluate your own business. Given the way your company is operating today, your relationships with your investors, and your projected growth, ask yourself if your current structure is still working. Will it be able to handle what the future holds—or does it make more sense to change over to a Limited Company?