Should you change your corporate status?

Way back in December 1997, Inc. Magazine published an article that discussed the circumstances under which a business may want to consider switching its corporate status.  Among the conditions it discussed were the following:

• The company needs capital. If you’re simply contemplating raising your credit line or bringing in some informal investors, you can probably stay with whatever structure you’ve got. But if you’re aiming for venture capital or a public stock offering, you’ll need C- corporation status.
• You’re exploring incentive compensation. A deferred-compensation arrangement will likely mesh with whatever corporate structure you’ve got. But setting up a stock option plan will be much easier if you switch to C status. The exception: you can use an S structure if the number of employees covered–plus the number of previous shareholders–doesn’t exceed the new 75-owner limit for S corporations.
• The company is profitable and no longer capital hungry, and you’re looking to boost your personal income. One quick solution might be to switch from C- to S-corporation status, thus eliminating the double tax on all dividends paid out to shareholders. But don’t go this route if you’re also contemplating an IPO: you won’t be able to revoke your decision for five years.
• You’ve got great prospects, but the company is still losing money like crazy. Corporate losses, and the tax benefits they can provide, may be more valuable if you switch to a C corporation. That’s because, in many cases, S-corporation owners can claim corporate losses only on their personal tax returns up to the amount of their total investment. With C corporations, most losses can be claimed (or carried forward into later tax years) at the corporate tax level.
• You’re thinking about adding fringe benefits but are looking for ways to control their costs. It’s time to get your accountant to do a cost-benefit analysis. Many fringe benefits for owners turn out to be cheaper with C-corporation status. But don’t switch before figuring out whether the cost of double taxation would wipe out any benefits you’d receive from a switch.

• You’re diversifying the company into a new business line. Wait! Although switching to an LLC structure is often too costly to make sense for an established business, you might be able to achieve real benefits by organizing your new venture from day one as a limited-liability company.

Be Sociable, Share!

• 

About the author  To change this standard text, you have to enter some information about your self in the Dashboard -> Users -> Your Profile box. Read more from this author

• The Problem with Series LLCs The new, Series LLC abandons the comforts of asset protection precedent, and introduces a new, completely untried and untested concept into which uninformed promoters and unwary business owners are stumbling. The Series LLC is an exciting new development in business entity law that is currently getting a lot of attention......
• Financial Statements and Fund-ability Disraeli once said that "there are three kinds of lies: lies, damned lies, and statistics." In business, some of the "statistics" that can tell such damning lies are the numbers found on company  balance sheets and income statements. Too often, the reality is not accurately reflected in the numbers. Accounting......

• 3 Topics to Not to Write About on a Corporate Blog
• Corporate Blogging Pitfalls