Choosing a business structure is a decision that should never be taken lightly. While income taxation and owner liability are the primary differences between a C corporation, S corporation, or limited liability company (LLC), there are other lesser-known variations that could significantly impact your business. The good news is business structures aren’t set in stone; it’s possible to switch from one to another.
Here are four smart moves to consider before you choose—or change—your business structure:
#1. Think About Putting Real Estate in a Separate LLC.
When an asset is taken out of an LLC, it comes out at basis, meaning it doesn’t result in a taxable transaction. But when an asset is taken out of a corporation, it comes out at fair-market value. Because of this, many business owners will establish their operations up as an S or C corporation, and put their real estate in a separate LLC. This strategy can help you avoid creating a gain if you were to sell your operations and rent your real estate to the new owner.
#2. If Selling is Your Exit Strategy, Consider an S corporation.
If your exit strategy is to someday sell your business to a third party, an S corporation is likely to be more tax advantageous. That’s because a with C corporation, you could be subject to double taxation at the federal level. Current federal tax regulations require you to make the switch from a C to an S corporation 5 years before the sale, so it’s important to act as soon as possible.
#3. Know When It’s Time to Switch from an LLC.
An LLC is often the best choice for sole proprietors. In this case, it doesn’t require a separate tax return and keeps the filing process simple. If you own an LLC, however, you’re subject to a self-employment tax, which makes sense…until a certain point. When the LLC begins hiring employees or outsourcing various tasks, its revenue is likely to grow. And this could dramatically increase the amount of self-employment tax you would have to pay. At this point, it would be advantageous to make an S election, which would allow you to take a salary and limit the amount of self-employment tax on the business’s earnings.
#4. If Change is Ahead, Be Sure to Conduct a Review.
If you’re looking ahead to a potential sale or ownership changes, it’s a good idea to review your business structure. This is also true if you’re planning to drastically alter the service or product you offer. Your CPA can help you determine whether you should change your election or keep your current structure. Likewise, if you’re just starting out, your CPA can help you choose the structure that will be best for your business—now and in the years to come. Contact Jen Verly for more information or to discuss your situation.