Sole Proprietorships are good business structures, especially when you’re company is still starting. But this business structure has a number of weaknesses especially those related to personal liability and taxes. This is why after they have been operating for some time, most businesses decide to turn into either a corporation or a limited liability. Do you think it’s time for your sole proprietorship to incorporate or form an LLC?

Transitioning Your Sole Proprietorship Into a New Business Structure

Almost all businesses in Orange County, California started as a sole proprietorship. This is mainly because a sole proprietorship is the easiest business structure to form. If you’re just starting a company, you want to minimize all the stresses that are involved and one way to do that is to choose the simplest business structure. But then as your company grows and evolves, a sole proprietorship business structure won’t cater to your business needs anymore. Most businesspeople decide to turn their sole proprietorship into another business entity—either a corporation or a limited liability company because these two entities are favorable when it comes to taxes and personal liability.

To find out whether your sole proprietorship structure is no longer enough for your business and forming a limited liability company or corporation is necessary, there are a few questions that your need to answer. A few of those questions are:

1. Is Your Business Engaged in Risky Activities?

Some businesses in Orange County, CA are inherently riskier than others when it comes to putting their personal assets in danger. Examples of businesses that engage in risky activities are those that use hazardous materials, those that manufacture or sell food products, those that involve caring for children or animals, and those that build or repair structures and/or vehicles. If your business engages in risky activities, you must consider incorporating it or converting it to a limited liability company. Limited liability companies and corporations are business structures that provide the protection of “limited liability”. This means that your personal assets will be shielded from debts and claims that are business-related.

2. Have Your Personal Assets Grown?

Evaluate your personal assets and check whether they have grown since you started your business. Having a significant amount of personal assets is an adequate reason to convert your sole proprietorship to a limited liability company or a corporation. Limited liability protection is offered to a limited liability company or a corporation. Without this protection, your personal assets can be in danger if your company cannot pay off business-related debts or satisfy court judgments made against it.

3. Do You Have Business Insurance to Cover the Risks of Your Business?

Knowing that a sole proprietorship business structure does not offer “limited liability” protection, many sole proprietors in Orange County, California resort to obtaining insurance to protect their personal assets. Businesses may use an insurance policy to guard against many other things like work-related car accidents that involve their employees. Depending on the nature of your business, some insurance policies may cover most of a business’ risks. If most of the risks are covered, you may not need to convert your sole proprietorship to a limited liability company or corporation. Weighing the pros and cons of making the conversion requires working with a specialist who understands all the facets that must be considered.

4. Have You Been Considering Selling Stock to Investors or Issuing Employee Stock Options?

To raise your company’s investment capital, you might consider selling stock or issuing stock options to attract and retain valuable employees. But to do this, you first need to incorporate your business. Although limited liability companies can also raise capital by selling membership interests, the process of doing so is more tedious and burdensome compared to issuing stock especially if you expect to have multiple investors or intend to raise money from the public.

One of the advantages of being able to issue stock is the ability to make gifts of stock to family members as part of an estate plan. Gifts of corporate shares can easily be made without giving up management control.

5. Has Your Profit Substantially Increased Since You Started Your Business?

Corporations allow owners to file income tax separate from their company’s income tax since the business is legally recognized as a separate entity from its owners. If your sole proprietorship has started to turn a good profit, you could save some income tax by incorporating your business in California and keep some of your profits in the corporation each year. The profits that are left behind, also called retained earnings, are taxed to the corporation at corporate income tax rates. Corporate income tax rates are lower than most business owners’ individual income tax rates.

6. Are You Planning to Start Providing Extensive Fringe Benefits?

Corporations enjoy many tax benefits and one of those is that they can deduct the full cost of fringe benefits such as health insurance and reimbursement of medical expenses that are provided to their employees. Employees also don’t have to pay any tax on the value of these fringe benefits.

There are many different kinds of business structures in Orange County, California that can also deduct the cost of various fringe benefits as a business expense. If you are planning on adding health insurance and other fringe benefits for your employees in the near future, you need to consult with a business attorney on what business structure should you convert your company into.

7. Are You Concerned About Retaining Your Status as an Independent Contractor?

Many companies in Orange County, California decide to become a corporation because they are independent contractors and they want to make sure that the IRS or other government agencies will not reclassify them as an employee. Reclassification does not happen for incorporated independent contractors and this is why many clients insist that certain businesses incorporate first before they hire them.

Assistance from a Competent Business Attorney in Orange County, California

To properly convert your sole proprietorship into a different business structure, you need to have assistance from competent legal counsel. There are many competent business lawyers in Orange County, California, and among them are the lawyers of Incorporation Attorney. They offer many legal services for businesses in Orange County, California including converting a sole proprietorship into a different business structure such as corporations and limited liability companies. For more information about the various legal services that they offer, contact them at (714) 634 1414.