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Entity Structure & Tax Implications

Today, there are more choices than ever in selecting the appropriate business entity. Historically, there were three choices: the sole proprietorship, the partnership and the corporation. Now there are a number of hybrids that combine various characteristics of each traditional entity, such as the limited liability company, which combines the limited liability of a corporation with the flexibility and tax advantages of a partnership. All states offer limited liability companies as an option for most types of businesses. Other recent options include the limited liability partnership. State law can also play an important role in determining the best entity. State law governs many important aspects of business entities, both tax and non-tax (i.e., in some states an S corporation is treated more favorably than in others).

The structure of your business significantly influences your overall tax position, and therefore, it is in your best interest to choose a structure that efficiently minimizes your tax burden, whil maximizing your business value and growth potential. Effective structuring is an important aspect of both business and personal wealth creation.

Your initial decision, on the legal structure under which you would operate, may have been weighted by factors such as costs, size, and possible longevity of the business.  But as your business changes and grows, the question must be asked, is it still the most appropriate legal structure for my business?

Types of Business Structures

There are four main types of business structures commonly used by small to medium size businesses:

  • Sole Trader:  an individual trading on their own
  • Partnership:  an association of people or entities carrying on a business together 
  • Trust:  an entity that holds property or income for the benefit of others – this is not a legal entity
  • Company:  a legal entity separate from its’ Shareholders, capable of holding assets in its’ own name, and Shareholders own the Company while Directors run it.

Sometimes, a combination of the above is used very effectively to minimize the potential risks and liabilities to you and your business, and help improve your income tax position.

Changing Your Business Structure

There are a variety of reasons for moving a business from one structure to another.  However, changing your business structure can be a complex matter.  There are a myriad of legal, tax and commercial implications.

Choosing the right business structure is an important decision, so you need to investigate each option carefully to decide which best suits your needs and which structure is best for the long term benefit of your business.

Factors to Consider

Each business structure has advantages, disadvantages and responsibilities which need to be considered before making a decision.  Therefore, when choosing a business structure, some of the key factors to consider include:

  • Taxation requirements and liabilities
  • Legal liability
  • Costs
  • Capital requirements
  • Management requirements.

Your business structure should accommodate the potential for changing circumstances with minimal disruption; provide adequate protection, opportunities for legitimate tax reduction and efficient distribution of profits.

At BARR CPA LLC, we can help you make the right decision, whether you are starting your business or whether your business has changed.  If your business has changed, a review of your current business structure will help determine which business structure will better meet you and your business needs now and in the future.