Bootstrapped But Growing:

Key Considerations for Changing Your Business Structure

Deciding when and how to change entities is crucial as your business grows. If your company is becoming more complex and facing higher risks, moving from a sole proprietorship to a limited liability company (LLC) or from an LLC to a corporation can provide the liability protection, tax flexibility, and credibility you need.

Understanding differences in entity types can help you select the best one for your business goals.

Sole Proprietorship vs. LLC: What’s the Difference?

A sole proprietorship and LLC each offer distinct advantages and limitations regarding liability, taxation, and management.

Sole proprietorship: Simple and risky

A sole proprietorship is the simplest business structure, with few formalities and a direct flow of profits to the owner. Many businesses start with this structure because it’s cost-effective and straightforward. However, it offers no personal liability protection. 

As your business grows, you may experience a variety of complex risks, including:

• Legal issues—lawsuits, employee claims, contract disputes

• Financial strain—higher expenses, debt, tax complexity

• Compliance violations—regulatory fines, legal obligations

• Reputational damage—public mistakes, negative reviews

• Cybersecurity threats—data breaches, hacking risks

• HR challenges—team management, turnover, policy issues

Increased risks without liability protection can jeopardize your personal assets. For this reason, many businesses outgrow the simple sole proprietorship and seek the legal protection of an LLC.

LLC: Protection and flexibility

An LLC offers limited liability protection and flexibility. It’s a separate legal entity distinct from its owner(s) regarding legal rights and responsibilities. It can enter into contracts, own property, sue, and be sued in its own name. The owners are generally not personally liable for business debts and obligations. Creditors or claims against the business can’t reach your personal property like your home, vehicles, or savings. 

LLCs also provide flexibility for taxation, management, and ownership. While LLCs can be more expensive to set up than sole proprietorships, they offer far greater protection as your business grows.

When do you need an LLC? Signs it’s time to make the switch include:

• Increased risk. If your business is entering contracts, hiring employees, or acquiring assets, the liability protection of an LLC is crucial.

• Tax advantages. LLCs can offer taxation flexibility, potentially saving you money.

• Credibility. An LLC can add professionalism to your business, which is appealing to customers, partners, and investors.

If your business is starting to grow rapidly or take on more risk, transitioning to an LLC could be beneficial. 

LLC vs. Corporation: Which One Is Right for Your Growing Business?

If your existing LLC is experiencing significant growth, consider converting to a corporation. Understanding the differences between an LLC vs. a corporation will help you decide.

LLC: More flexibility, less complexity

LLCs combine flexibility, simplicity, and protection. They are easier and less expensive to form and manage than corporations. They also offer pass-through taxation to avoid double taxation and provide liability protection that shields personal assets from business debts. Additionally, LLCs allow for more flexible management structures.

LLCs can face drawbacks such as self-employment taxes, a limited ability to raise capital, and less robust liability protection in certain situations.

Corporation: More structure and funding options

A corporation is a separate legal entity that provides stronger liability protection. However, corporations have more formalities and ongoing paperwork requirements, such as board meetings and annual reports. They are also subject to double taxation, taxing both the business and the shareholders. As a company grows, converting to a corporation can help attract investors, offer stronger liability protection, and provide potential tax advantages.

Steps to Change Your Business Structure

Once you’ve decided you need to change business structure, here’s how to make the switch:

• Identify your goals and needs. Clarify the reasons why you need the change in structure to help you determine which structure will serve you best.

• Consult a professional. Speak with a business attorney and/or accountant to understand your options and navigate the complexities of making the change.

• Paperwork. Complete and file the required paperwork for your chosen entity with the appropriate state agency. Be prepared to pay accompanying filing and registration fees.

• Apply for a new EIN. If your structure changes, you may need a new Employer Identification Number (EIN) for business identification and tax purposes.

• Update your business documents. Your operating agreement, bylaws, manuals, and contracts should reflect your new structure and any changes.

• Notify stakeholders. Inform your clients, vendors, suppliers, and employees about the change of structure and how (if at all) it impacts them.

• Update accounts. Make necessary changes to your business bank and financial accounts.

• Compliance. Check federal, state, and local regulations to ensure your new business entity is compliant, including getting new licenses or permits.

Lastly, get excited! Changing your business structure is a time to celebrate your company’s growth and success. Make sure you enjoy it. 

Bizee Can Help You Change Business Structure

Bizee makes it easy to change your business structure based on your company’s evolution and growth. Whether switching from a sole proprietorship to an LLC or converting to a corporation, Bizee handles the paperwork, filings, and compliance requirements so you can focus on growth. With easy-to-use tools and on-demand support, Bizee helps ensure your new structure aligns with your goals, protects your assets, and positions your business for long-term success. We have helped over 1,000,000 entrepreneurs launch and grow their businesses. Let us help your business grow.