Successful companies evolve over time. It may be necessary to restructure your business to make it more profitable. Typical problems businesses face include acquiring additional capital, shrinking profit margins, unhappy customers, inefficiencies or adopting in an evolving industry. In an effort to address these issues, you may need to add or remove owners, modify ownership interests, change your legal structure, expand operations into other states, sell assets, refinance loans, change operations, add new verticals, remove unprofitable ventures, reorganize business functions, renegotiate contracts or some combination of all of these actions.
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. Whenever an entity has 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, whether the departure is voluntarily or involuntarily.
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.
- An LLC or corporation may make an election for tax purposes to be treated as an S corporation to minimize taxes.
- If your business is operating in another state, you may need to register as a foreign entity in that state.
You will need to comply with the applicable legal requirements and your entity documents when you implement these types of changes.
Sales transactions can be involved. At a minimum, the parties need to address how the sale will be organized and conducted, identify the assets to be transferred, document how the buyer will fund payment and describe the liabilities and warranties each party is assuming and providing.
Mergers and Acquisitions
In an effort to expand its market share, your company may decide to acquire an existing business or combine forces with another company to create a new, joint organization. These transactions can be complex and may require careful structuring in order to minimize tax consequences.
Whenever you make changes to an existing contract, be sure to document the new agreement in writing and have it signed by the parties.
Restructuring a business can be complex. Business owners should consult with their legal advisers for interpretation of specific requirements concerning reorganizational matters. For more information, please contact Kathy Tremmel at Tremmel Law, PLLC at (512) 539-0317 or firstname.lastname@example.org.