At some point in its lifecycle, a business may see the need or opportunity to change its legal structure. Changing a legal structure has many implications. For example, accounting after an LLC to S-Corp switch requires considerable effort and professional assistance.
What is the Significance of a Legal Business Structure?
A legal business structure is the framework that defines how a business is legally recognized and operates. Choosing a business entity is a key step when establishing a new business, but the business structure can be changed if the business’s needs change.
The factors to be considered when choosing a legal structure are the extent to which the owner(s) are personally liable for business debts and obligations, and second, how the business and its owners are taxed. Third is the ease and expense of forming and maintaining the chosen legal structure. Fourth, the ability to attract investors and raise capital. Fifth, the amount of paperwork, record-keeping, and compliance requirements associated with the structure.
There are five common legal business structures:
- Sole proprietorship
- Partnership
- Limited Liability Corporation (LLC)
- C-corporation
- S-corporation.
Changing a form of business entity can be done, but the many implications of making a change include, for example, accounting after an LLC to S-Corp switch.
LLCs and Traditional Corporations
Perhaps, like many entrepreneurs, you founded your business as an LLC because creating an LLC is fairly straightforward and the setup is relatively inexpensive. Switching to an S-Corp offers some financial benefits. In an LLC, an owner must pay taxes on corporate income and a 15.3% self-employment tax. Not so for an S-corporation. Also, retirement contributions are taxed differently. Thus, switching business entity taxes can be beneficial.
Changing Your Business Structure. Accounting After an LLC to S-Corp Switch
Changing your business structure requires the following steps for accounting after an LLC to S-Corp switch:
- Open a new business bank account in the name of the new entity.
- Update your accounting software and records to record the new business structure and bank account information.
- Change your chart of accounts to reflect the new business structure.
- Adjust all journal entries to reflect the new structure and ensure accurate financial reporting.
- Transfer all relevant financial records from the old entity to the new entity. This can include tax filings, payroll records, and all supporting documentation.
- Financial statements must be prepared under the new entity.
- Ensure all contracts and agreements reflect the new entity.
- Review and update insurance policies.
- File the final tax return for the old business structure and deregister it with the appropriate authorities. Prepare and file tax returns for the new business entity.
- Address ongoing considerations, including informing vendors, suppliers, and other stakeholders about the change in business structure.
Be sure to work with legal and tax professionals throughout the transition of legal entities to ensure regulatory compliance and to follow proper LLC to S-Corp bookkeeping and accounting procedures.
Seek Professional Accounting Assistance
Contact Orcutt & Company, based in Milford, OH. We deliver comprehensive financial management for small business owners and individuals, providing strategic solutions that best address client needs and aspirations. Our comprehensive accounting services keep you organized and give you the data you need to make prudent business decisions, including bookkeeping, payroll, and tax.
