The beginning of the year brings many questions for a business owner. One of the biggest questions for sole practitioners is whether this is the year to change entity types to a more formal entity such as a corporation or LLC. (For sole proprietors, partnerships typically aren’t considered, because, as the name implies, you have to have more than one person in a partnership.) There are several things that sole proprietors should consider when they ask themselves this question.
The first question to ask is why is the sole proprietor a sole proprietor to begin with. Is the business a small business on the side (such as someone that sells Avon or Mary Kay products and only makes several hundred dollars a month)? When the business owner started, did he or she set it up as a sole proprietorship because he or she didn’t have enough money (or know the right people) to find out whether it should be set up that way? These questions may help a business attorney determine whether the sole proprietorship was correct when the business started and whether it remains appropriate.
The second is whether forming a more formal entity would help decrease any legal liability on behalf of the owner. Is the business a high liability business (and the result could surprise even the business owner)? Is the business one that has a high chance of failure? Is the business one that will have multiple owners, some of whom may not want to materially participate in the business? These questions may help a business attorney determine whether the sole proprietorship was correct when the business started and whether it remains appropriate.
The third is whether forming a more formal entity would help decrease any tax liability on behalf of the owner. Is the business owner paying too much employment tax? Would forming a more formal entity cause the business owner to pay capital gains or some other tax actually hurting him or her?
In addition to these concerns, there are many other concerns to look at. For instance, questions about the record keeping capabilities of the business owner, the business owner’s estate plan, and the long-term goals of the business owner are a few to think about.
When considering whether it is time to change business entities, the sole proprietor should always consult a qualified business attorney who can help guide him or her through the legal and tax ramifications of the choices that he or she has.
If you are a business owner who wants to make sure your business is structured correctly, call your Denver business attorney Elizabeth Lewis at 720-258-6647 or email her at firstname.lastname@example.org today.
As always, this article is for informational purposes only and does not contain legal or tax advice. Please consult with your attorney or accountant for legal or tax advice to ensure a great 2010!