As your company gets off the ground, its needs and organizational style will evolve along with your overall mission. To reflect this, you may want to change the official structure of your business. However, it’s important to understand how a new classification might affect your operations and whether you’re ready for the transition. Use the commercial law guide below to learn more.

When Does It Make Sense to Change Your Business Structure?

The majority of small businesses start out as sole proprietorships, where the entrepreneur controls nearly every aspect of the company. If you entered into the venture with a friend or colleague, you may have chosen a simple partnership instead.

These structures don’t require any registration and are perfect for companies managed by one or two people. On the other hand, they don’t offer considerable legal protection or tax benefits for you or your partner.

Once you’ve started to build your team or look for investors, you might want to change the structure to a limited liability company (LLC) or a corporation. These structures will protect your personal assets from liability, so if an employee gets injured or you need to file for bankruptcy, only the business assets can be seized. In other words, you won’t have to pay for an employee's medical bills with your own home, vehicle, or personal family inheritance. This liability protection also extends to customers and vendors.

Changing your business structure to an LLC or corporation will increase the likelihood of getting an investor and ensure these investors don’t overstep their boundaries in terms of your business. Additionally, formal business structures offer tax benefits and make it easier to secure loans.

What Steps Are Required to Change a Business Structure?

If you’re currently considered a sole proprietorship or simple partnership, you’ll need to register as a formal business structure with the state government. In Hawaii, small business owners must register with the Department of Commerce and Consumer Affairs, Business Registration Division (BREG). Once you file the appropriate forms and submit the application fees, you can expect a response in a few weeks.

Then you’ll need to arrange a formal operating agreement, a document that outlines the policies and organization of your business. This will list the rightful owners of the company and their rights and responsibilities. If there’s ever a commercial law conflict regarding your business, you’ll refer back to this document to come to a resolution.

Corporations require even more complicated setup processes, including appointing officers, a board of directors, and a shareholders agreement.

To avoid issues down the road, work with a commercial law attorney when altering your structure. Donald L. Spafford, Jr., Attorney at Law, is happy to help Honolulu business owners through this complicated process. Whether you’re interested in starting a corporation, an LLC, or a formal partnership, you can rely on his 30 years of experience to address all the important details. Learn more about his practice areas by visiting the website, or call (808) 532-6300 to schedule a free consultation.