Business

Make Your Business Entity Help You

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Many people think the only way to start a new enterprise is to form a Limited Liability Company. Maybe you started your business with an LLC because it was easy to do and now some limitations are becoming apparent.

An LLC, being a hybrid between a partnership and a corporation, does provide limits on liabilities from the business and avoids federal taxes on income at the enterprise level. But, a corporation using a subchapter S election can do that also. The LLC is relatively easy to set up and requires minimal reporting.

As a business strategist, I’d encourage you to think deeper and consider that your business entity can provide significant help in achieving your goals by facilitating a number of strategic things.

Looking further down the road, beyond starting an enterprise, you should have a vision of what you are trying to build and possibly even your exit strategy. You may be at a point where you need to make some significant changes to get to the proverbial next level.

As a business strategist, I’d encourage you to think deeper and consider that your business entity can provide significant help in achieving your goals by facilitating a number of strategic things.

—Tom Conroy, lead counselor, Small Business Center at Central Piedmont Community College

Is your company clicking along on all cylinders, growing at an impressive rate and now you are generating the revenue you always thought it would? Maybe the revenue stream realized each year is pushing you into the higher personal income tax brackets with required self-employment taxes. An S corporation can pay you a “reasonable” salary, deduct payroll taxes and distribute excess profits as a dividend. These dividends are taxed at a lower rate.

The LLC can elect to be taxed as an S corp to achieve that benefit.

Possibly the business has reached a point or your plan calls for raising capital for growth or the next phase. How will the capital be raised? If you expect to offer equity ownership, it is usually more convenient to sell shares of stock in the company. Or, maybe you want to use ownership as a profit sharing or deferred compensation arrangement to attract talent that may otherwise be unaffordable. Stock options future vested shares may provide the needed compensation.

Shares only exist in corporations. But, watch out, shareholders of an S corp must be U.S. citizens or permanent residents. To use this plan, the enterprise may have to be a C corp if non-citizens are going to be the shareholders.

There are some strategies that work with LLCs not possible with an S corp. An LLC can have different classes of members so it’s possible to create a non-voting class or one that receives a specific annual return as opposed to the one share one vote and distributions according to stock ownership in the S corp.

When it comes time to exit the business how will this be accomplished? Can you maintain an ownership position while a management team handles daily operations and possibly increases their ownership through profit sharing? This can reward loyal employees, transfer ownership and maintaining long term dividends.

So, as you think about your business model, how you want the company to grow and an ultimate exit, ask your CPA or attorney which business entity will best help you achieve those goals.

Thomas E. Conroy, BS MBA, is president of tec Strategic Partner, a consulting firm providing practical, strategic coaching to owners of small businesses. He is lead counselor at the Small Business Center at Central Piedmont Community College and is a frequent business speaker. Reach Tom at tconroy@tecStrategicPartner.com.

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