Selecting the best legal entity for your business not only affects business profitability and operations, but also your taxability, benefits, risk exposure and your ability to accumulate wealth as an owner or executive. When considering which entity is best for you, do not limit your consideration exclusively to the tax attributes inherent in the various entity structures. Think ahead to what types of assets the business will have, how you will finance the business, what will happen when you are winding down or liquidating the business, or even taking distributions from the business.
Keep in mind that sometimes it makes sense to change your business structure after you have been operating in your initial form, in order to accommodate new goals or facts. When doing so, it is important that you fully understand the tax consequences before changing the form.
Here are a few considerations you should take into account when determining what entity type is best for your business:
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Pass-through taxation vs. double taxation
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Flexibility to allocate tax items among owners
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Flexibility to make distributions other than pro rata
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Flexibility in the types of owners (e.g., corporate, foreign)
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Owner participation in management
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Liability protection for owners
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Tax rates
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Treatment of liabilities for tax purposes
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Type of property to be held inside entity
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Ability to compensate employees with equity participation
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Exit strategies
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Ability to use losses
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Employment tax consequences
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Employee benefits
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Impact of state taxes
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Estate and gift taxes (particularly relating to valuation of business interests)
Learn more about the various entity types:
Our tax professionals offer a wealth of experience assisting businesses choose the most advantageous entity structure to meet their business goals. For more information on selecting the right entity type or to get started, contact your local CBIZ MHM office.
