In part I of this blog series on business structure, we defined the four most common types you can choose from. Now we consider five scenarios that could affect your decision.
It’s important to note that this is not an all-inclusive list or formal tax advice, rather several reference points for consideration.
- Assuming your business does not have specific requirements on the type of structure it can select, you are free to choose whichever you prefer. However, the structure that meets your needs today may not be the best for you 10 years down the road.
- If you, your partners, and your investors are all U.S. citizens, then you have a greater deal of flexibility in your business structure. You do lose the option of sole proprietorship by virtue of not being a single owner. That being said, this is not an issue so long as you get along with the other business owners.
- If you, your partners, or one of your investors is not a U.S. citizen, you need to move forward with selecting either a C-corporation or an LLC business structure. Ultimately, the decision comes down to long-term objectives or the type of business you want to run.
- You should also consider the shareholders’ ability to pull cash out of the business. On the one hand, you and your fellow owners/investors may want to make an S-corporation selection to avoid double taxation on dividend payments. On the other hand, you may want your partners to leave a greater percentage of cash in the business for reinvestment, or plan to take on more than 100 shareholders/investors. Under these conditions, selecting a C-corporation structure allows for double taxation on dividends, which may serve as a deterrent to pulling too much cash out of the business, providing you with the ability to take on as many investors as you want.
- Most importantly, consider your business’ goals. While we all want to be successful, not everyone wants to hold onto their business forever. Additionally, some owners may even want to explore an initial public offering someday. If that’s the case, a C-corporation may be the best option for you. Conversely, you may have a small, lucrative family business that your children are being groomed to take over. An LLC will offer a more simplified structure that provides the benefits of a pass-through entity, and nearly all of the protections of a corporation.
Once again, there is no right or wrong decision when selecting a specific business structure. However, depending on the business, your goals, growth over time, and the industry you operate in, there may be certain considerations that make one structure more appealing than another.
If you have questions or would like to have in-depth and confidential discussion about your business and its current structure, please contact a member of our Topline team at (240) 499-2040 or firstname.lastname@example.org.