Is Your Business Ready for a Structure Change?

Three-fourths of CEOs running small and mid-size businesses reported in March 2011 that they were anticipating higher revenues in the year ahead, and nearly 60% expected rising profits. Among those who expressed confidence in their futures, 54% expected to hire more employees and 50% were planning to invest in their facilities.¹

Growth is often accompanied by change. In fact, the U.S. Small Business Administration has found that increased employment and faster growth are factors that often lead businesses to change their legal form of organization.²

For business owners seeking to reduce their exposure to risk, a popular entity in recent years has been the limited liability company (LLC).³ Here are some additional benefits associated with LLCs.

Legal protection — An LLC offers many of the legal advantages of a corporation and may help shield the business owners’ personal assets from lawsuits brought against a firm’s products or employees. In theory, financial losses would be limited to the owners’ stake in the company, but exceptions may include any business debt they personally guarantee or misdeeds (such as fraud) they carry out.

Simplicity — In most states, an LLC is easier to form than a corporation, and there may be fewer rules and reporting requirements associated with operating an LLC. The management structure is less formal, so a board of directors and annual meetings are not usually required.

Tax efficiency — An LLC is a pass-through entity for tax purposes, so a firm may avoid tax liability by passing profits or losses on to the members (owners), who declare them on their personal tax returns. Members are allowed 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.

Flexibility — The structure of an LLC may help facilitate growth because it’s possible to add an unlimited number of owners and/or investors to the business, and ownership stakes may be transferred easily from one member to another. LLCs may also be owned by another business.

Owners who aspire to expand their operations may want to explore whether an LLC, or another type of business structure, would better suit the company’s particular needs.

1) USA Today, April 8, 2011
2) U.S. Small Business Administration, 2011
3) The Wall Street Journal, March 28, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

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