Starting an Online Business All-in-One For Dummies®, 3rd Edition

Changing Your Organization As It Grows

Just because you select one form of structure when you're starting your business doesn't mean that you're stuck with it forever. As with other decisions you make along the way, you might find that your growing company warrants a different legal structure at some point. The ideal situation is to select a structure that gives you the most flexibility at the time you start up. Sometimes, though, that's not reasonable. The next-best plan of action is to understand when and how you should change your organization.

Perhaps the best indicators are those related to money and ownership. As a small-business owner, if you use your money better through different tax strategies, waste no time making the transition. Many businesses start out as sole proprietorships because that option is simple. When the owner hits a certain level of income, however, it makes sense to incorporate based on the amount of self-employment taxes being paid. The advantage of saving several thousand dollars outweighs the compliance burden of incorporation. As they say, it's a no-brainer!

Then there's the matter of owner status. As a sole proprietor, if you take on an additional owner, you have to convert to a partnership or some form of corporation. Similarly, if you're operating a general partnership and then decide to seek out other owners for investment purposes, forming a corporation and offering stock might make sense.

You can much more easily switch from a sole proprietorship ...