Accounting on Tap

ENTITY STRUCTURE BY DAN BERGS, CPA

It is important to know how to structure your business. The best entity for you today may not be the best entity for your business in the future.

An integral part of your business planning is to consider what form of business is best for you. There are different planning factors in determining an initial business structure versus an established business. There are two primary factors to consider when forming a business.

The first primary factor is the legal liability for the business. The legal liability includes how to best protect your business and personal assets against claims of vendors, customers and other creditors. The second primary factor is tax implications. This includes how to minimize taxes in the short term and in the long term. Making a decision to benefit the short term can sometimes be costly in the long term when selling or transitioning a business.

There are other factors to consider as a business matures. Those factors include succession, investors and employee benefits. Succession has to do with passing on the business to your family or key employees. There are many ways to structure a business transition and a business entity structure can have a significant impact on how your business is taxed.

One scenario that impacts an entity structure is when a business seeks investors, which could include taking on active business partners or outside investors. When seeking business partners, it is important to review your business structure to ensure you have the proper liability protection.

It is always advised to talk with a legal advisor on deciding the

“Making a decision to benefit the short term can sometimes be costly in the long term when selling or transitioning a business.”

best business entity to help protect your business. Addressing the business entity is also very helpful in order to address multi-owner situations. Planning in advance can help avoid potential issues in the future.

Another important factor to consider is employee benefits. Employee benefits are not only important for your employees, but also very important to you. Health insurance, life insurance, cafeteria plans and retirement benefits are all important benefits to consider. The deductibility for these benefits can change depending on your entity choice. The ability to provide benefits for yourself and your family certainly should be considered when thinking about your business entity structure.

Looking at the list of possible business structures is a daunting task. You may choose from a sole proprietorship, general partnership, limited partnership, limited liability company or LLC (taxed as a disregarded entity, a partnership, a C corporation or an S corporation), limited liability partnership or LLP, or a corporation (taxed as a C or an S corporation). Each type of entity structure has advantages and disadvantages in regard to succession planning, investors and employee benefits.

Selecting an initial form for your business is not a decision to be made lightly. It is important to consult your attorney and your accountant prior to making this very important decision. In addition, it is vital to plan a periodic review of your business structure to be sure it is still the right choice for you.

The timing of these decisions are crucial and periodically reviewing the business entity structure is beneficial for longterm business planning. TLW

Dan Bergs, CPA, is a supervisor in the tax and business services department with Wegner CPAs LLP. Wegner CPAs LLP has offices in Madison, Baraboo, Waukesha and Janesville. This article is not intended to give complete tax advice, but a general review of subject matter. For more information, please contact Bergs at (608) 442-1986 or dan.bergs@wegnercpas.com.