This month, we’ve looked at some of the most common and popular structures for businesses and today, I wanted to wrap that up a bit by sharing some things to think about before you make any decisions.
Basically, I’ve got five questions for you to think about, and, if the answer isn’t “easy,” then you should consider sitting down with a tax professional or legal counsel that focuses on business to make sure you’re headed in the right direction.
So let’s dig in!
· What extent do you, as the legal owner, need to be shielded from legal liabilities? While an LLC, an S-Corp, or a C-Corp all offer this to a greater or lesser degree, other structures, like a sole proprietorship, offer no legal protections to your personal assets. Now, this might be okay if you were a writer or a computer programmer who did contract work, for example, but the real world we live in is a litigious one. You MIGHT get away with a good insurance policy to cover a sole proprietorship, but today, I really cannot recommend it, especially given the low cost of entry into the LLC game.
· Where are the opportunities to mitigate taxation in the business? The truth of the matter is, a business that has little to deduct or write off may not need a lot of tax options. On the other hand, smart business owners know that designing their company and choosing the right entity structure allows for long-term growth and planning, too. Even though a sole proprietorship might be “right” now, what happens when that company suddenly experiences rapid growth? “Tax problems” might seem fun, because they generally mean you’ve made a lot of money, but planning ahead and choosing the right structure can prevent worry down the road.
· What are the real-world costs of doing business? A C-Corp offers the singular best protection to owners, but the administrative costs of setting one up and managing it year after year can be immense. Obviously, there’s a balance to be struck between the tax liabilities, management costs, and overall profitability, so these all need careful consideration based on your own growth and expansion plans.
· Obviously, this leads to the long term goal – the entity structure you choose must be flexible for the future. There’s simply no way around this one! The structure you create and use has to provide you with the amount t of protection and tax mitigation you feel is correct (I know how subjective that is) and it needs to ensure that your business growth is protected in the long run, too. The last thing you want to do is build a business as a sole proprietorship, then grow too fast and open yourself up to a lawsuit and a huge tax bill!
· Building on that flexibility, your entity should be able to handle long term challenges. When you build it right the first time, you need not worry about how the business can be sold, or what happens if one partner wants to get out of the company. The business structure helps to dictate the rules of survivorship, ownership, and even taking a company public. This is why it’s so critical to make sure you understand your long term goals for growth and expansion, no matter how small your business is today.
NONE of these are “easy” questions, if you think about them properly. That’s why I shared them! On the other hand, every one can be sorted out and does have a specific answer for you and your business. As always, I’m happy to help you find those, so if you’re struggling with them, don’t worry – schedule a time for us to talk and we’ll be happy to figure out the right answer to each and every one of them.