Kajko, Weisman & Colasanti, LLP

Converting a business as part of a succession strategy

Business owners could transfer ownership of sole proprietorships in Massachusetts via a sale of the business assets. This type of sale, like almost any other, would require some planning to minimize tax burden. After some analysis, planners might discover that a conversion, such as incorporation, is advantageous from a financial perspective. 

There are several cases in which a succession plan might include incorporation. The most common is associated with long-term planning. For example, the 15-year outlook of most sole proprietorships includes significant expansion. Larger businesses often carry higher risk for their owners. This increased scale of liability -- combined with the fact that sales of business interests might be simpler to execute than asset sales -- often prompts sole proprietors or unlimited partners to include a conversion to limited liability corporation to their leadership succession plan. 

LLC is one of the most common forms of small business. According to the Cornell Legal Information Institution, this type of structure allows tax benefits of a partnership and the legal protections of a corporation. In exchange for these advantages, business administrators must file quite a bit of paperwork with the state. 

FindLaw suggests four steps one might take to convert a business form from one to another. Some of these might not be relevant to a succession plan. The most important would likely be:

  • Obtaining an employer identification number from the IRS
  • Registering LLC documents with the state

Those who wish to include incorporation into their succession planning could complete some of these steps ahead of time. For example, having partially completed articles on file might considerably reduce the time it takes to complete a conversion.

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