Business Entity Strategies

Small Businesses undergo many changes in their lifetime, all of which can have major tax implications. Depending on size and financial circumstances, the business entity that was selected when operations began may not necessarily be the best option to move your business forward with increased profitability.

Our experienced staff recognizes the major indicators and key changes to a business that may suggest an entity change. At times, a corporation or partnership may need to be dissolved, or an LLC may need to be formed to allow for more flexibility, lower taxes, or increased protection from other liabilities. Although each business structure may react differently, your business may benefit from an entity change if it has recently:

• Hired it's first employees, or hired a substantial amount of new employees
• Fired all or most of it's employees
• Sought to bring in partners and investors
• Searched for more convenient ways to pay partners or corporate officers
• Explored ways to reduce personal income taxes for it's owners
• Looked for additional business tax deductions
• Sought additional employee perks and benefits
• Experienced a back-tax debt for withholding or income taxes
• Acquired another business, or merged with another business
• Made major expansions

Certain types of business classifications may offer savings in the form of personal income and self-employment taxes if properly constructed, but often introduce additional accounting guidelines and restrictions, and can add greater costs to tax preparation services. An S-Corporation is a good example of providing methods to allow for a certain portion of income to be free from self employment taxes, but the structure also requires officers to pay themselves reasonable compensation as employees. Therefore a balance must be struck. Also, S-Corporations are limited in their soliciting of investors and in their amounts of investment income.

For businesses aspiring to become larger, sell stock, and completely separate their personal finances from the company, a C-Corporation will be a better fit. There are no restrictions on the amount of investment monies that can be placed in the entity, and the entity itself shoulders most of the liabilities from it's actions and exposure. The drawback is that the C-Corporation doesn't allow for owner draws (or pass-through of income to it's shareholders) as readily, and gives fewer options for personal income tax savings for it's owners. The C-Corporation (or standard corporation) has some of the most stringent accounting guidelines as it's finances must be completely separate from those of other related entities.

Sole Proprietorships and Partnerships make up the last group. These are the simplest entities to form, operate, and maintain proper accounting records for, but are also subject to the most liability from increased exposure. If the business is liable for anything (taxes, insurance, etc.) the individuals are also equally liable. There is no way for these entities to pay their ownership in the form of wages, and all monies owed to the proprietors is paid in the form of taxable draws (subject to 15.3% self employment tax, plus additional income taxes). Therefore, estimated tax payments must be made to account for the taxes owed throughout the year.

Each entity has its own distinct advantages and disadvantages. Depending on the recent changes and anticipated improvements of your business, your current classification may need further examination to see if a different method might be more advantageous. Call Aspen Accounting & Financial Services at (877) 212-7736 for more information, or schedule a free consultation to learn more about how an entity reclassification could save you on future taxes