As your company grows and changes, you may want to consider if you have the right entity type for the present stage of your business.
Perhaps you’ve chosen to do business as a sole proprietor to avoid the costs and maintenance of a formal business entity, and you are concerned with the liabilities associated with the business and how your personal assets are at risk.
Perhaps you chose to form as an LLC, for the simplicity of maintenance and liability protection, and you’re at a stage where you’d like to take outside investment. You may find that investors’ preference is to be a shareholder of a corporation, not a member of an LLC.
Perhaps you organized as an S corporation for the benefits of pass-through taxation and liability protection, but now you’ve reached some of the limitations of an S corporation.
Perhaps you’ve formed as an LLC in California, and your revenue has reached the threshold where your franchise tax is being calculated on gross receipts, not on profit.
However your business grows, the decision of entity type should be revisited periodically. Since businesses change over time, there is not necessarily one best choice for all stages of a company’s life.
Each entity type can have its advantages and limitation. Here are some questions to ponder:
- How important is it to protect your personal assets against liabilities and debts of the business?
- Will the number and type of owners change in the future?
- If you are an LLC, are you paying taxes calculated on gross receipts, and could you reduce your taxes by becoming a corporation?
- Are you satisfied with how you presently allocate profits and losses among owners?
- Do you anticipate changes in how you’ll want to allocate profits and losses?
- Do you want to provide retirement and fringe benefits to owners?
- Do you want to offer medical reimbursement to owners?
- What are the plans for future growth?
As always, if you have any questions, please contact us here or at (800) 610-0373. Some of these are questions for your accountant or attorney, and we’ll do our best to get you answers or point you in the right direction.
