Tax Pros& Cons of changing business structure

Aug 17, 2023

Tax Pros & Cons of Changing Business Structure

When it comes to running a business, there may come a time when you need to consider changing your business structure. Whether you're starting as a sole proprietorship and want to transition to a partnership or you're looking to convert your small business into a corporation, it's important to understand the tax implications of such a change. In this blog post, we'll explore the tax pros and cons of changing your business structure, helping you make an informed decision.

Pros of Changing Business Structure

1. Tax Savings: One of the main reasons businesses choose to change their structure is to take advantage of potential tax savings. For example, converting from a sole proprietorship to an S corporation can allow you to save on self-employment taxes by splitting your income into salary and dividends.

tax savings

2. Increased Deductions: Certain business structures offer more tax deductions than others. For instance, as a corporation, you may be able to deduct more expenses such as healthcare costs, travel expenses, and retirement contributions.

tax deductions

3. Flexibility in Profit Distribution: Changing your business structure can provide flexibility in how profits are distributed among owners. For example, partnerships allow for proportional distribution based on each partner's ownership percentage, which can be advantageous when one partner has a higher tax bracket.

profit distribution

Cons of Changing Business Structure

1. Complexity: Changing your business structure can be a complex process, involving legal and administrative tasks. It may require additional paperwork, such as filing new tax forms and obtaining new licenses, which can add to the overall complexity of the transition.


2. Tax Implications: While changing your business structure can offer tax advantages, it's important to consider the potential downsides as well. Some conversions may trigger immediate tax liabilities, such as capital gains taxes on appreciated assets or built-in gains tax for S corporations.

tax implications

3. Costs: Changing your business structure can come with costs. You may need to hire professionals, such as tax advisors or attorneys, to guide you through the process. Additionally, there may be filing fees and other expenses associated with the legal and administrative aspects of the change.



Changing your business structure can have significant tax implications, both positive and negative. It's essential to carefully evaluate the pros and cons before making a decision. Consider consulting with a tax professional or business advisor to ensure you choose the best structure for your specific circumstances. By understanding the tax implications, you can make an informed choice that will benefit your business in the long run.