Nearly nine months ago, USA Today reported that about three quarters of the nation’s small- and mid-sized business leaders indicated they were anticipating higher revenues in the year ahead, and nearly 60 percent expected rising profits. Among those who expressed confidence in their future, 54 percent expected to hire more employees, and 50 percent were […]
Nearly nine months ago, USA Today reported that about three quarters of the nation’s small- and mid-sized business leaders indicated they were anticipating higher revenues in the year ahead, and nearly 60 percent expected rising profits. Among those who expressed confidence in their future, 54 percent expected to hire more employees, and 50 percent were planning to invest in their facilities.
Only time will tell if the cautious enthusiasm turned into reality. What cannot be disputed, however, is growth is often accompanied by change (and the same may be said for business contraction). We know that increased employment and faster growth are factors that often lead businesses to change their legal form of organization. Why? Savvy business owners should constantly be looking for ways to reduce their exposure to risk.
While there is really no way to completely avoid risk, many find that adopting the business form of a limited-liability company (LLC) provides a step in the right direction.
What are the potential benefits? An LLC offers many of the legal advantages of a corporation and may help shield the business owner’s personal assets from lawsuits brought against a firm’s products or employees. In theory, financial losses would be limited to the owner’s stake in the company, but exceptions may include any business debt that has been personally guaranteed or misdeeds (such as fraud) of the owner.
An LLC may also be simpler to deal with in the formative stages. In many states, an LLC is easier to form than a corporation, and there may be fewer rules and reporting requirements associated with operating an LLC. Single-member LLCs carry the easiest tax-compliance burden of all, so a single owner may find the LLC a favorable option to incorporation. Another potential plus — a board of directors and annual meetings are not usually required in an LLC.
From a general tax perspective (not just limited to the single-member LLC noted above), an LLC acts as a pass-through entity for tax purposes, so a company may avoid tax liability by passing profits or losses on to the members (owners), who declare them on their personal tax returns. Members have the latitude to choose whether the company is taxed as a sole proprietorship, a partnership, an S corporation, or a C corporation, provided it would qualify for the particular tax treatment. One caveat: not all conversion transactions are without tax consequence.
Finally, think flexibility. The structure of an LLC may help facilitate growth as an unlimited number of owners and/or investors may be added to the business, and ownership stakes may be transferred easily from one member to another. LLCs may also be owned by another business.
Perhaps you are thinking now is the time to begin the LLC consideration in earnest. Your first conversation should be with your CPA where you can establish an understanding of the potential benefits and drawbacks, compliance requirements, transition concerns, as well as discuss possible tax consequences and set a solid plan in motion.
Gail Kinsella is a partner in the accounting firm of Testone, Marshall & Discenza, LLP. Contact Kinsella at gkinsella@tmdcpas.com