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4 Signs it’s Time to Restructure the Business

  • 24 June 2015
  • Author: Cari Holbrook
  • Number of views: 3866
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4 Signs it’s Time to Restructure the Business

The tools that worked for you in the past may not work anymore. If more family businesses heeded this advice, there would be far more success stories to be told. Learning when and how to restructure your business (from an LLC to a Corporation, for example) can be the key to unlocking your potential for success.

Below are four changes that may indicate your business structure may be due for a renovation.

1.  Profit changes

Business structures are most often determined based on the tax advantages and liability protection they provide. The amount of income the business generates for its owner (or owners) can help determine which structure is most advantageous.

 

Oftentimes, sole proprietors or LLC business owners choose to switch to S-Corporation status once they reach a certain income level. This can save the business owner from ‘double taxation’ on business income by dividing an owner’s share between salary and other distributions. It can lead to tremendous tax savings for those who do it right. However, the IRS will scrutinize those who seem to “game” the system by not designating what it considers a reasonable salary.

2.  Ownership changes

In a family business, ownership changes often occur only when one generation is ready for the next generation to take over. However, handing the reins to the next generation doesn’t necessarily mean the company will (or should) be managed in the same way.

 

As PwC discovered in its 2015 U.S. Family Business Survey, one-fourth of family business owners expect to pass their businesses on to the next generation but only as passive owners, leaving a management company or leadership from outside the family to actively run the business. In fact, up to 60 percent of family businesses surveyed by PwC have family members who hold an ownership interest in the company but don’t work for it.

 

You can revisit this strategy in our blog post “Can a Family Business Thrive with Only Passive Heirs? Whether your exit plan includes heirs, a partnership buyout, or complete sale of the business, restructuring the company before the handoff may be necessary for a smooth transition.

 

3.  Liability changes

Progress is good. However, with progress may come increased liability. If you’ve recently added assets like more trucks to your company fleet or a new piece of equipment to your production line, you may need to look at restructuring the business in order to isolate those assets (and their associated liabilities) from the rest of the business.

 

Real estate ownership is a common example. If you’ve had the good fortune of acquiring the building or property where you operate your business, for instance, it may be best to create a holding company for the property that is separate from your operating business structure. Not only can this help protect assets from liability, but it may offer certain tax advantages as well.

 

4.  Tax law changes

While the government doesn’t seem to move quickly on, well, anything, it’s a wonder how often tax laws seem to change. Since 2001, there have been nearly 5,000 changes to the Tax Code. As Forbes’ Kelly Philips Erb observes, “That’s more than a change per day. The Tax Code is now about four million words, nearly as long as seven versions of War and Peace or the novel version of Les Miserables and just under four times the number of words in all of the Harry Potter books put together.”

 

This can make compliance difficult, much less identifying ways to take tax advantage beyond merely following the laws. But within these changes can be hidden opportunities for certain business structures, whether they’re spelled out or not. For that reason alone, it’s important to work with a tax professional to review Tax Code changes annually.

 

When was the last time you evaluated the effectiveness of your business structure? Is it still working for you? Feel free to contact us to find out. And, for additional information regarding business structures, take a look at our previous blog posts including “Is an S Corp Election Worth the Risk?” and “How an LLC can Help a Business Thrive.

Image Copyright: alphaspirit / 123RF Stock Photo

Chart Courtesy of PricewaterhouseCoopers LLP



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