The choice of the best tax treatment for a start-up or for an established organization undergoing a reorganization can be complex, but it is a critical decision that directly impacts the bottom line. The choice not only impacts the company’s current tax liability, but can also affect the company’s ultimate sale price. Important considerations include:
- Is the company expected to be profitable and generate significant cash from day one, such as professional services? This favors partnerships and S-Corporations.
- Do the owners want to avoid the complexity of pass-through entities and the compliance burdens for their members and owners? This favors C-Corporations.
- Will the company generate losses in its early years and require significant capital investments and expenditures? This can favor C-Corporations.
- Looking to qualify for the small business stock exclusion under Section 1202? That requires a C-Corporation.
- Will the company own property expected to appreciate in value (either intangible property or real estate)? This favors partnerships and LLCs.
- If you are self-employed or an independent contractor, you may be able to lower your self-employment tax liability by using an S-Corporation.
- Will the company have institutional investors, different classes of equity, or will it have non-U.S. owners? This disqualifies the entity from S-Corporation status (although individual U.S. owners may be able to own through their own S-Corporation).
Jon advises on the appropriate type of entity for start-ups, companies undergoing restructuring, creditors exchanging debt for equity, and private equity funds and other investors making cash investments in private companies. Jon has experience comparing different options as well as assisting with compliance and tax election requirements. For example, Jon helped one client obtain a ruling confirming the classification of an entity as an S-Corporation after that entity failed to make a valid S-Corporation election.