Many small businesses start out as sole proprietorships or partnerships. A sole proprietorship is formed by default when a person starts a business if another form is not chosen (i.e. a corporation or LLC). A partnership is formed by default when two or more individuals start a business if another form is not chosen. However, as the business becomes more successful, the owner or owners are faced with the choice of whether it is appropriate to change into a corporation or LLC.
The biggest reasons, although not the only reasons, to change entity types are:
- the company is becoming larger and the owners want limited liability for the company’s actions,
- the company is making more money and the owners want to take advantage of certain tax breaks offered to corporations and LLCs, or
- the company is becoming more successful and the owners either want to offer ownership in the company to its employees or other individuals.
In addition to these reasons, there are many other reasons that an owner may want to stop being a sole proprietorship and pick a company structure. One may be that the owner is going to bring on a co-owner and wants the protection of corporate law for the company as opposed to partnership law.
If you are wondering whether it is time to switch from being a sole proprietorship or partnership to a company structure, please feel free to call me, your Denver business attorney, at 720-258-6647, email me at firstname.lastname@example.org or contact me through my contact form.