As a business grows and develops, the initial legal structure chosen by its founders may become less suitable for the company’s future needs and goals. Fortunately, Pennsylvania state law provides ways to change from one type of business entity to another. Here’s what you need to know about the whys and hows of changing your Pennsylvania-based business’s structure.
Common Reasons for Changing Business Entities
Some of the most frequent reasons business owners convert their company from one entity type to another include:
-
Growing business
-
Needing limited liability protection after forming as a business without such protection (e.g., sole proprietorship, general partnership)
-
Bringing in new business partners
-
Bringing in outside investment
-
Changing tax planning needs or objectives that require a different form of business taxation (e.g., S Corp or C Corp taxation)
-
Restructuring multiple affiliated businesses
-
Changing regulatory requirements
Methods of Changing Business Entities in Pennsylvania
Pennsylvania business owners have several avenues for changing their company’s legal structure:
-
Statutory conversion : A statutory conversion arguably provides the easiest method of changing from one business entity type to another. Statutory conversions allow companies organized or registered to do business in Pennsylvania to convert from one type of legal entity to a different kind of Pennsylvania entity by filing a Statement of Conversion with the Pennsylvania Department of State.
-
Statutory merger : Alternatively, business owners can convert their company’s legal structure through a statutory merger. A merger involves the combination of two businesses. Statutory mergers can effect a change of entity type by creating a new entity with the preferred legal structure and merging the existing business into it, with the new entity becoming the surviving entity. Mergers can have legal and tax complications for companies, which is why it’s important to have legal advice before pursuing this method.
-
Dissolution and reformation : As a last resort, business owners may change their company’s entity type by dissolving the existing business and forming a new one under the preferred structure. However, this option can involve significant legal challenges and risks, including potential capital gains taxes, loss of the existing EIN, potential personal liability for the dissolved business’s debts and obligations, and difficulties in transferring contractual rights and obligations to a new business.
Step-by-Step Process for Converting Your Business Entity
Converting a business from one legal type to another involves several steps:
-
First, owners should evaluate the legal and tax implications of the change and the preferred method for implementing it by consulting accountants and attorneys.
-
Next, owners should confirm that their existing business and their desired new entity type qualify for a conversion.
-
Owners should then prepare the necessary paperwork to effect the entity change, whether through a statutory conversion or another method.
-
After completing the conversion, business owners should obtain a new EIN (if necessary) and update their licenses and registrations with state and local agencies.
-
Finally, owners should also notify banks, insurers, vendors, and landlords of the conversion.
Common Mistakes to Avoid
Avoid these common mistakes as you convert your business from one legal structure to another:
-
Assuming that a conversion automatically changes the company’s tax treatment, as certain types of tax treatment require a business to file an election form with the IRS
-
Forgetting to update licenses, registrations, and contracts (including leases and insurance policies)
-
Overlooking required partner, member, or shareholder approval for the change
Contact a Business Attorney Today
If your company’s needs and goals are changing, you may need to change its legal structure as well. Contact The Cooney Law Offices today for an initial consultation about the process of converting from one business entity type to another in Pennsylvania and to get legal help to guide you through each step. Our business lawyers are proud to serve Pittsburgh and Allegheny County, as well as the whole Western Pennsylvania region.
