5
Factors to Consider When Choosing a Business Entity Selecting
the proper type of business entity is an extremely important decision.
And it's not only for new businesses. Find out what
factors you should be thinking about before making a choice.
One of the first
things to think about when starting or acquiring a business is selecting
the appropriate form of legal entity. The appropriate form for your
circumstances depends on a variety of tax and non-tax considerations.
Keep in mind
the following 5 factors when deciding on what type of entity
your business should be:
Liability
Protection - Personal liability should be your number
1 factor in determining what entity you should choose. Know
that sole proprietorships and general partnerships offer NO liability
limits for their owners/partners (i.e., your personal assets
are
up for grabs). If you're in a "high risk" industry,
then consider a limited partnership, LLC, LLP, S or C Corp.
Taxes – Taxes
are a MAJOR factor in choosing an appropriate business
entity. There can be significant cost savings in picking
one form
over another, especially when it comes to self-employment and
income taxes. But don’t forget payroll and estate taxes either.
You can literally save thousands each year by having the
right
entity. There are still plenty of 4 leaf clovers in the US tax
code. One of them is the fact that S-Corp net income is still NOT subject to the self-employment tax.
Management
Structure – Your company's management structure will determine which entities
you can or cannot have. Obviously if a business is owned by more
than one individual, you can’t be a sole proprietor. In addition,
if you wish to offer your KEY employees minority ownership,
you’ll need to plan in advance and choose the entity that best
accomplishes that. [You may also want to consider splitting up
your business into several different companies, i.e., one business
for sales and marketing, another for production, etc., and make
them different legal entities. I have worked with many clients
using this strategy and we have had some pretty outstanding results.
But it isn’t for everybody.]
Ownership
Transition–
While this situation doesn't present itself frequently, in some
circumstances you may need to change your company’s form of entity
to accomplish a transition in ownership (perhaps you have a child
coming into the business?). A thoroughly planned strategy here
can save you boatloads of cash (i.e., gift, bequest, installment
sale, stock redemption, etc. – Since this can be a highly complex
and involved area, it's absolutely essential that you talk to
a professional about your particular circumstances.
Capitalization – Finally, at some point your business may need to raise capital
from external sources in order to fund expansion and growth. Picking
the right entity in this case will help you get the money you
require. Mind you, this doesn’t necessarily mean an IPO (initial
public offering). I know of several businesses that raised plenty
of money issuing private debentures with convertible stock warrants
(bonds and/or debt financing). Obviously, you’ll need something
more advanced than a sole proprietorship. [Incidentally,
alot of small business people are not aware that you don’t have
to be a BIG company to raise money by issuing bonds with warrants
or other debt. As long as you have a small private offering,
you can absolutely raise money for your small business using debt
financing.]
There
are also other factors in determining the proper legal entity
for your business,
but these, in my opinion, are the more important ones. Keep in
mind that you don’t necessarily have to be a new business to
think about which entity is best for you.Many
established businesses should review their form of legal entity
on an annual basis to determine if it’s still cost effective
and the best way to go.
Keep
in mind that your form of business entity is like having a car.
At some
point if your business gets bigger, you’ll need something with more
room and power. The reverse is also true. What’s the sense in having
a station wagon, when a compact will do?
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article personally with me, please write to
me at alex@goldminetactics.com
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