The owner of a growing business faces new questions because he or she may be hiring employees and may have more customers than when the business began. A growing business has the advantage of greater prosperity for the owner and the disadvantage of greater possibility for lawsuit from employees, customers, and competitors. Usually an owner begins business as a sole proprietor (also known as sole proprietorship). There comes a time when the sole proprietorship should be converted into an organized business entity like a corporation, limited liability company, or a limited partnership.
How do you know when it is time for you to convert your sole proprietorship into a corporation, limited liability company, or a limited partnership? Only you can decide when the time is right. I recommend considering the following factors to discuss with your business attorney when thinking about whether to convert your sole proprietorship into a business entity:
1. Number of owners, partners, or investors;
2. Amount of gross revenue earned by the business;
3. Likelihood of inviting additional partners or investors;
4. Likelihood of risk in the business for financial loss or personal injury;
5. Intensity of risk when financial loss or personal injury occurs;
6. Sensitivity to federal income taxes;
7. Whether the business owners own real estate other than their homesteads;
8. Whether the business owners have cash assets that exceed $30,000;
9. Whether the business will someday “go public”; and
10. Level of concern that one or more partners in the business might get divorced, disabled, go bankrupt for other reasons, or die.
Answering these ten questions with your business law attorney will help you decide when the best time will be for you to convert your sole proprietorship into a corporation, limited liability company, or a limited partnership.