Accounting on Tap

HOW AN EFFECTIVE ENTITY STRUCTURE MIGHT SHIFT OVER TIME

BY DAN BERGS, CPA

Many business entities begin as one type of entity and remain the same entity for the entirety of the business. But every few years, a business should evaluate the legal form of the business. As an integral part of planning for your business success, consider whether your current form of business is going to suit you for the next year, five years, 10 years and into retirement. The initial factors of choosing a business entity structure are different than planning for an established business.

Please consider these two primary factors when forming your business and determining your initial business structure: • Tax implications. Significant tax law changes have occurred over the last several years and new legislation is pending. This pending legislation would likely have income tax repercussions for businesses and individuals. • Legal liability. How can you best protect your business and personal assets against claims of vendors, customers and other creditors?

Other factors to consider for your business are: • Investors. If you are considering taking on partners or outside investors, the choice of entity might need to be changed. This is applicable to new businesses, as well as businesses that might be taking on investors to open another location and expand the current business. It’s a good time to review your form, and document the various legal and tax issues that need to be addressed in multiowner companies. • Succession. How will your business continue when you retire? Is your entity structure optimal to make sure you are maximizing the after-tax dollars from the sale of your business? The business entity selection will have an impact on how the sale of your business is taxed. • Employee benefits. Many restaurants and bars do not offer insurance benefits, such as health, dental, life, disability, vision, etc. In a competitive market, these benefit offerings may be necessary. If providing benefits for yourself and your family, your choice of business entity structure can help determine whether you can use these benefits as tax deductions.

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 (LLC), which is taxed as a disregarded entity, a partnership, or a C or an S corporation • Limited liability partnership (LLP) • Corporation, which is taxed as a C or an S corporation

Each type of entity structure has advantages and disadvantages for succession planning, investors and employee benefits. Consider both short- and long-term planning when forming the correct business entity.

Selecting an initial form for your business is not a decision to be made lightly. It is important to consult your advisors prior to making this 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 important and periodically reviewing business entity structures is beneficial for long-term business planning. TLW

As an integral part of planning for your business success, consider whether your current form of business is going to suit you for the next year, five years, 10 years and into retirement.

Dan Bergs, CPA, is a supervisor in the tax and business services department with Wegner CPAs LLP. The firm 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.