If you are a business owner, reconsidering your choice of entity should be an ongoing process. Don’t wait for a crisis or a triggering event to think about it. Your original choice of entity (whether sole proprietorship (SP), partnership, S corporation, C corporation, limited liability company (LLC), or other) was not necessarily a permanent selection. You should regularly evaluate a number of business issues, including liability exposure, tax considerations, the ability to raise capital, and employee compensation. The type of business entity you choose impacts these issues. If you are anticipating or experiencing changes in these areas, your business may benefit from a change of entity.
You may decide that only a portion of your business needs a change of entity. In such a case, you may be able to arrange a tax-free spin-off, split-off, or split-up of your business to facilitate the change.
When Does Reconsidering Choice of Entity Make Sense?
As mentioned, you should be evaluating your choice of business entity on an ongoing basis. You may want to give it serious consideration if it will:
- Substantially reduce your personal liability exposure
- Help you achieve favorable tax results for you and your business
- Help you raise needed capital for your business, or
- Improve your compensation package at a time when this is a priority
A change of entity may positively affect one of these areas while negatively affecting another. You should look at the totality of circumstances when making a decision.
Be aware that changing entity can involve significant costs. You may incur filing fees, attorney’s fees, new taxes, and the expense of changing your accounting system, among others. You should include these costs as part of the totality of circumstances you are evaluating.
Over the next couple of weeks, we’ll focus on each of the above four aspects. In the meantime, if you have questions, contact the Experts at Henssler Financial: experts@henssler.com or 770-429-9166.