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The Smith + Howard tax team first and foremost seeks to understand your current business situation and your goals for the future. We probe deep, asking questions that support an entity selection:
Entity selection affects your current and future operations as well as your tax strategy, including significant tax implications from a federal, state and international perspective. Your entity choice can also play an important role in future liquidity events.
There are pros and cons to each type of entity. Let us help you navigate so that you make the best choice for your company today and the future.
There are times in the business lifecycle that you may reassess whether your initial entity selection is the best option for the future.
Restructuring should be considered when your business model changes, while planning for an acquisition or disposition, and as part of estate planning.
The primary types of business entities to consider include:
Smith + Howard’s tax professionals focus on the “and” in our approach to recommendations on entity selection: an entity selection that provides the most tax efficient approach and an acceptable level of liability protection and one that meets your business objectives.
Entity selection often involves planning with the end in mind. C Corporations can result in double tax upon a sale on the one hand but can also reduce or eliminate taxes on capital gains if you qualify for the IRC Section 1202 exclusion.
Flow-through entities — such as LLCs, partnerships and S Corporations — can result in win-win situations for buyers and sellers with capital gain as the goal for sellers and a step-up in basis as the goal for buyers.
If you plan to keep your business in the family, estate planning considerations point to certain entities. Other planned exits require a different analysis to make the proper choice.
Question – What is your exit strategy?
A talented management team is critical to effectively executing your business strategy. Your entity type will determine the options that are available to incent your key people in a tax efficient manner.
In general, LLCs and partnerships offer the most flexibility for transferring equity. Alternatively, stock options are widely understood and work well for C Corporations.
Understanding what motivates the current and future leaders of your business will factor into your entity selection choice.
Question – How can you best incentivize your leadership team?
The current ownership and future capital requirements of your business are vital considerations in the entity selection process.
If you are planning for outside investors, you must consider the type of entity in which they will want to invest. The tax status of your owners may also limit the entity options available for your business.
For example, partnerships and other entities are not permitted to own an S Corporation whereas some foreign investors insist on investing only in C Corporations. If multiple classes of stock are required, an LLC or C Corporation are often better choices.
Question – Who are the current and future owners of your business?
Where your business operates is an important consideration when selecting an entity type. A business that operates throughout the U.S. and internationally will require a more complex analysis than a single retail location.
Even if you operate out of a single location, your location will influence the choice of entity. For example, some states do not recognize S Corporations.
The compliance requirements can vary based on entity type and should be reviewed before selecting an entity.
Expansion plans for your business should not be overlooked in the entity selection process.
Question – What are the growth plans for your business?
Income and losses are taxed very differently based on entity structure. Flow-through entities (LLCs, partnerships, S Corporations and sole proprietorships) generally pass all taxable income and losses to their owners to report and pay taxes. C Corporations account for income or loss at the entity level and the corporation is responsible for any income taxes.
In addition to the entity or flow-through tax considerations, distributions of cash are treated differently depending on the entity type.
Early stage companies with losses are often set up as flow-through entities so that the owners can offset other income with the business losses (subject to limitations).
Income generating companies will often select an entity based on projected tax rates and dividend plans.
Question – Have you projected your taxable income or loss?
Selecting an entity type must often be done without complete knowledge of the future. This is when flexibility becomes an important criteria in the entity selection process.
Generally, an LLC can offer significant flexibility on the front end as it is often easiest to convert from an LLC to other types of entities if an LLC is no longer a good choice for your business.
It is usually more difficult to convert from a corporate structure to another type of entity without adverse tax consequences.
Distributing property from and separating various business lines can also be easier and more tax efficient if you aren’t operating in a corporate form.
Although certain entity types are more flexible than others, changes in structure can often be accomplished in a tax efficient manner for each entity type with proper tax planning.
Question – What future uncertainties exist for your business?
When selecting the best entity structure for your business from both a tax and a legal standpoint, you can’t just add up all the pros and cons of each type without analyzing the factors that are unique and important to your business.
You need a tax team that can help you see what this decision really means for your total business and tax situation. At Smith + Howard, you’ll find that team.
“In recent years, Smith + Howard has been invaluable in keeping us abreast of changes to the tax code and wider environment. They’ve guided us through complex issues we had no knowledge of, and time and time again, it’s proved to be invaluable for us.”Tom Nahigian, retired CFO of Abatement Technologies
“We use Smith + Howard for our audit, tax and special project work. Their advice and counsel is exceptional. Most recently, without Smith + Howard’s advice, we would have missed out on a $4M refund from a tax incentive program.”David Seem, CFO, Miller-Zell
“Their mindset is different. They’re constantly looking to see what our objectives are and they’re giving us the best possible advice and keeping up with all the rules and regulations. It’s like having an expert looking over your shoulder with what you’re doing.”Raj Anand, CEO, Southern States, LLC
The tax team at Smith + Howard is available to assist with a customized approach to entity selection not only for the tax implications but also to help you achieve your long-term business objectives.
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At each step of the way, we will work with you to maintain compliance and minimize your taxes, while establishing a long-term relationship built on quality counsel and efficient, responsive service.