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26 September 2017

7 Signs Your Business Entity Needs to Change

7 Signs Your Business Entity Needs to Change
Choosing the right business entity at the right time may  be a good way to minimize your taxes, reduce creditor liabilities, and offer more flexibility in your succession plan. While the decision shouldn’t be taken lightly and could incur significant costs, reviewing your options should be something you do on a regular basis, similar to performing regular maintenance on your car so it continues to run smoothly. Even seemingly small changes could signify a structure modification is in order, like an LLC instead of a sole proprietorship or a corporation.

The following are some of the most common signs your business entity may need to be recalibrated. Do any ring true for you?

  1. You’ve added assets/property or employees. Examples include adding a fleet of vehicles, purchasing your own manufacturing equipment or computers instead of leasing, and hiring employees for the first time. Changes in the type or amount of assets, property, or personnel the business has could affect two important success factors: your liabilities and your taxes. If you’re a sole proprietor, it’s likely time to think bigger (in structure).
  2. You’ve added products or services or have taken ownership of more of your production process. Once you start producing goods and services in addition to selling them, you can qualify for certain manufacturing tax breaks if you’re structured correctly. This enters an area of tax code that is often overlooked, so ask your tax advisor a lot of questions and get creative.
  3. The business is, or will be, interested in attracting investors, or may be changing leadership, including a new owner as part of an exit plan. Entrepreneurs often find that a structured entity (LLC, C-corp, or S-corp) has advantages for raising capital and attracting investors.
  4. The business is adding owners/shareholders. If you’re a sole proprietor wanting to add a partner, a change to a partnership (including LLC taxed as a partnership, or limited partnership) may be all you need. S-corps, on the other hand, can have up to 100 shareholders and all shareholders must be U.S. citizens, while C-corps can have unlimited shareholders. 
  5. You want to offer employees and owners fringe benefits. Recruiting and retaining top talent can mean getting creative when it comes to the perks you offer. Health insurance, retirement plans, education and day care assistance, employee meals and snacks…these are just the tip of the iceberg when it comes to the benefits you can offer…often at a tax deduction for you, if you structure and plan wisely.
  6. Your purpose or mission has changed. Lesser-known corporate structures like B-corps (taxed like C-corps but driven by public good), closely-held corporations, and nonprofit corporations can offer great advantages for owners with very niche needs. If you’re unconvinced your purpose or mission fits within one of the more traditional business structures, it could be time to dig deeper.
  7. There have been changes in local or federal tax codes that affect the business. While taxes in general are a certainty, the amount and nature of taxes are in constant motion.  If the Trump administration has its way, there will be huge tax reductions ahead for pass-through entities like partnerships, S-corps and LLCs. Other tax code changes like Section 179 for deducting property fluctuate, so it’s important to stay on top of tax changes and how different structures are affected.

If any of these areas raise questions for you, feel free to contact us to help you decide whether your business entity is due for a tune up.

Image Copyright: dolgachov / 123RF Stock Photo


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