Anthony Cavaluzzi, the founder of Profit Management Solutions, knows the importance of entity structuring on the profitability of a company. The legal structure influences tax rates, paperwork requirements, board and management roles as well as liability protection. The right legal structure has a significant impact on how well a business will run. Though many times the structure is determined before operations begin, business growth or a merger could lead to the need for restructuring.
There are several options when determining the structure of a business, and what might work during the initial stages of business development and growth are not favorable a decade later. While there is a process for changing the structure of an entity, it is possible and potentially highly advantageous to your company.
Anthony Cavaluzzi Recommends Entity Restructuring for Tax Changes
The risks associated with running your business both grow and change as your business evolves. The personal liability you face may become too great or another governance works better with the expansions you’ve experienced. It’s also common for a restructuring to be one of the first changes that take place following a merger or acquisition. The impact on your tax burden is a leading reason why you should consider your entity structure and how it could be beneficial to change it.
Alter Your Tax Burden
The IRS holds two broad views of companies. They either fall under corporations or partnerships. Anthony Cavaluzzi, an experienced tax consultant, explains that the tax burdens differ according to the way profits are distributed. Corporations have their profits taxed before any distributions are made to the shareholders. This keeps shareholders from having taxable personal income from the business. On the other hand, both the profits and loss of a partnership are credited to the individual partners, who must then report these gains or losses on their personal tax returns.
Under IRS tax law, a company registered as an LLC is considered a partnership. If the fiscal year ends and a business turns a profit of $100,000, any partner registered to the LLC must pay taxes on the share of the profit according to their ownership in the company. If there are two partners with a shared interest, each individual will be subject to paying taxes on $50,000 in personal income. For some individuals and business owners, this is a financial surprise that can lead to owing the IRS.
Choose a Favorable Structure
One favorable change would be to move to a C corporation if individuals have a higher personal tax rate than the corporate rate. With this change, shareholders only pay taxes on any distributions or dividends they receive. Regardless of what structure is chosen, taxes will need to be paid. As Anthony Cavaluzzi advises, you can’t avoid paying the IRS, but you can change the burden you face with the right entity structure.