The type of business structure your clients choose for their companies affects them from legal, tax, and administrative standpoints. That’s why it’s so important for them to periodically review their business entity type to make sure it’s still the best option.
Of course, clients don’t always think about that. They have so many other things on their minds and packed schedules.
Although you should never provide legal advice to clients, sharing food for thought can help steer them toward making an informed decision about whether their business structure is fine as is or needs to change.
Signs That Your Clients Might Be Better Off Changing Their Business Entity Type
1. They have added or plan to add employees.
When a business hires employees, it becomes responsible for their actions on the job. Even with clear guidelines and rules, a business owner can never fully control everything. A business that operates as a sole proprietorship puts its owner's personal assets at risk because there's no legal separation between the business and the individual who owns it. By changing to an LLC, S corporation, or C corporation the business becomes a separate legal entity, thereby providing liability protection for the business owner. In the event someone sues the business or the business cannot pay its debts, the LLC or corporation will be responsible while the owner's personal assets, under most circumstances, will be safe.
2. They are bringing on a partner or co-owner.
If a business operates as a sole proprietorship and the owner wants to add a partner or co-owner, it will need to change its legal structure to a partnership, multi-member LLC, or a corporation. Note that while a partnership offers administrative simplicity, it does not provide personal liability protection for owners as do the LLC or corporation business entity types.
3. They want to ask investors for funding.
A business may look more attractive to outside investors if it has registered as a formal legal entity. And if a business owner wishes to sell company stock to raise funds, then the business will need to incorporate. S corporations don’t require the same degree of compliance formalities as C corporations, but they may only sell shares to up to 100 shareholders. C corporations may sell stock to an unlimited number of shareholders, which gives them the virtually limitless potential to raise money to fund their initiatives and fuel their growth.
4. They are getting pummeled by self-employment taxes.
Although a potential advantage of operating as a sole proprietor, partnership, or LLC, the simplicity of pass-through taxation can sometimes turn into a disadvantage. As a company’s profits increase, so does a business owner’s self-employment tax burden. By incorporating as an S corporation, however, an owner’s self-employment tax liability may decrease because only his or her salary will be subject to the 15.7 percent tax for Social Security and Medicare.
5. They want to sell their business or retire.
Sole proprietors and partnerships end when the owners decide to cut ties with the business or they pass away. By forming an LLC or corporation, however, business owners have options for selling or transferring ownership of their companies. How to Help Your Clients With Their Business Entity Formation Needs
Encourage your clients to talk with their attorneys to review their business entity type. And consider referring them to an online business document filing service that can help save them time and money when filing their formation and compliance paperwork. Some might even offer financial incentives for your firm when you refer business to them or resell their services.
Nellie Akalp is a passionate entrepreneur, small business advocate and mother of four. She is the CEO of CorpNet.com and recently launched a partner program for the accounting community. Accountants, CPAs, Bookkeepers and other professionals can offer business incorporation and compliance services to their client to extend their services but CorpNet does the work. More info at: CorpNet.com/partners