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Should you change your business entity status?

change your business entity

In the early days of your business, you likely filed your company as a sole proprietorship or LLC. While that status might have been ideal during the start-up phase, your business entity status might not make sense for your emerging business as it grows and changes.

Business growth often means the need for fresh capital, and some investors shy away from LLCs, for example. This blog lists several reasons for that, including that LLCs create a more complicated tax structure than many investors like. If you are preparing to seek investors or raise new capital, it might make sense to refile your business as a corporation. According to Joe Wallin:

“Raising additional capital through an LLC is much more difficult than raising a next round through a corporation. LLC agreements are more difficult and complex to prepare than their corporate counterparts. In addition, you can hit upon sticky and highly complex tax issues in the LLC context that just don’t exist or arise in the corporate context.”

The rules for changing your business entity vary by state, so it is wise to seek the counsel of a skilled small business attorney. In Colorado, the Secretary of State requires LLCs to follow a conversion process. That process includes preparing a conversion plan, gaining approval from all of your LLC’s members and filing a statement of conversion and articles of incorporation.

Online legal resource Nolo warns that each LLC’s procedure varies for obtaining approval for the conversion. Note that:

“It may take some investigation to determine the conditions for a legitimate approval of the plan of conversion. Colorado law does not impose a specific default rule, such as a simple majority vote You will need to check your LLC’s articles of organization to see if there are any rules regarding approval of conversions, mergers, or amendments. Depending on the details of your specific LLC, it is possible that approval would require the vote of all members. For more details, check CRS § 7-90-201.4. Depending on the details of your situation and your level of expertise, it may be advisable to seek the assistance of an attorney in confirming what kind of approval is necessary and anything else you are not sure about in preparing the plan of conversion.—Nolo.com

If you have questions about your business entity and whether a change in entity status is right for your company, contact EmergeCounsel today.