What’s the right business structure for you? It depends. I bet you knew that answer was coming, because it’s my favorite phrase when it comes to general questions about taxes.
In this case, some of the criteria that you and your tax & legal advisors will need to assess include:
- How much gross and net income you expect to make, and when,
- Whether you will need to bring in investors,
- Where you live and what nexus will the business have,
- Whether the company builds assets that appreciate,
- Exit strategies,
- Your current tax bracket, and
- Dozens more.
There are three times you need to assess your business structure, at a minimum. Look at the business structures you are using when:
#1: You first begin your business.
Thinking about your business structure is probably the last thing you want to do when you are thinking about marketing, sales, cash flow management, systems, fulfillment and operations. The business structure isn’t the most important thing you can do when you’re first starting. But it will help you save taxes and perhaps most importantly, protect your other assets when you’re starting.
Generally speaking, an S Corporation or an LLC that has elected S Corporation treatment is a good start-up business structure. If you’re a serial entrepreneur or have a number of investments, the Series LLC will allow you to build and change quickly and cost you much less money in the long run.
#2: Your business changes.
There is one thing you can count on when it comes to your business: change. You’ll add or subtract partners. Your business will make more money or less money. When it changes, take a look at your business structure again. The S Corporation you started with in the beginning might not work anymore if you’re building appreciating assets, intellectual property or your business income has gone up. It might be time to change or add a structure.
#3: Tax law changes.
We’re closely watching what happens as the full effect of the Health Care Bill and other tax changes come on line in the next few years. Next year, the perfect storm hits as (1) we have more auditors then ever before (2) tax cuts expire and (3) new surtaxes hit business owners and investors.
We’re watching the tax laws closely. As a result, we may see a shift to more C Corporations again.
What’s ahead? Change! Make sure your business structures and tax strategies keep pace.