FACTORS TO CONSIDER WHEN CHOOSING A BUSINESS STRUCTURE
One of the most important decisions to make when establishing a new business,
or when reviewing the state of your current business, is what form of business
entity to use. Each form offers advantages and disadvantages, so review the
following factors carefully before making your decision.
Tax issues. This is one of the biggest factor for many owners. C corporations
typically are viewed as a poor choice because the corporation pays taxes on the
profits and shareholders are again taxed on the dividends paid out. All other
business entities generally are taxed only at the personal or shareholder level.
Still, differences between corporate and individual tax rates may make C
corporations the better choice. C corporations sometimes have a tax advantage
over S corporations regarding accumulated earnings. Fringe benefits are
deductible at the C-corporation level and not at the shareholder-employee level,
which generally is not the case with other entities. Furthermore, you have no
choice but a C corporation structure if you want to take your business public.
Don't overlook state income-tax issues, either. For example, some states tax S
corporations and limited liability companies (LLCs) at the corporate level. From
an estate planning perspective, minority discounts may be higher for S and C
corporations than LLCs.
Converting from one type of entity to another also may limit what new structure
you choose, because conversions can raise significant tax issues. S corporations
have a difficult time converting to a C corporation without tax consequences, but
not vice versa. On the other hand, an LLC can convert to a C or S without tax
consequence (again, there are exceptions).
Liability issues. Sole proprietors and general partners usually are personally
liable for all debts and expenses, including those resulting from lawsuits or the
actions of other partners. Insurance can mitigate some of this...