Successful companies evolve over time. It may be necessary to restructure the ownership, legal organization, or operational processes of a company in order to make your business more profitable.
You may need to perform one or a combination of the following actions:
- add partners
- remove partners
- modify ownership interests
- change the business entity structure
- sell assets
- refinance loans
- change operations
- add new verticals
- remove unprofitable ventures
- reorganize business functions
- renegotiate contracts
Restructuring is usually driven by economic or tax reasons, and is more likely to be successful if the business owners understand the fundamental business problem or opportunity that their company faces. Typical problems include:
- profit margins shrunk for an extended period of time
- customers are leaving and are no longer satisfied with the business’s products or services
- the current systems no longer work or are inefficient
- team members are overworked or underutilized
- the industry is evolving
Adding owners, removing owners or modifying ownership interests
Understand the impact a change in ownership has on a business’s decision making processes, finances and taxes. Review the requirements in your company’s organizational documents before making any ownership changes. Update or amend the organizational documents so they correctly describe the rights and responsibilities of the owners and accurately reflect each owner’s interest in the business. If there is more than one business owner, it is important to have a buy-sell agreement specifying how the remaining owners can buy out a partner who leaves the business for whatever reason, whether the departure is voluntary or involuntary.
Changing the business’s entity structure
The legal entity structure that was appropriate when you started your business may need to be changed as the business grows and revenues increase. For example, an LLC may switch to a C corporation in order to raise money from investors, a sole proprietorship may choose to become a limited liability company in order to minimize the owner’s personal risk in the event a client sues the business, or an LLC or corporation may make an election for tax purposes to be treated as an S corporation to minimize taxes. You will need to comply with the applicable legal requirements and your entity documents to implement these types of changes.
Sales can be complex. Usually, the parties draft a business contract stating how the sale will be organized and conducted, which assets will be transferred, how the buyer will fund payment, details regarding approvals by the owners, and provisions regarding liabilities and warranties. It is also important to understand the tax consequences of the sale.
Whenever you make changes to an existing contract, be sure to document the new agreement in writing and have it signed by the parties.
Business owners should consult with their legal advisers for interpretation of specific requirements concerning reorganization. For more information, please contact Kathy Tremmel at Tremmel Law, PLLC at (512) 539-0317 or firstname.lastname@example.org.