Oftentimes the tax benefit analysis is not a “legal question”, but rather an “accounting question”. If you are unsure of whether you might benefit from a change in your business structure, ask your CPA for more specific information about the different options (incorporation, partnership, LLP or LLC) and what they would mean to you in dollars and cents.
As far as asset protection, the first rule is to always have the appropriate insurance policies! But even the most careful business owner can find him/herself involved in a lawsuit. You may not have significant assets right now but be aware if that a judgment is rendered against you it may be collectable several years from now. So you should not ever take asset protection lightly.
If you already have significant assets and your business is doing well it is time to consider taking asset protection to a level beyond the mere purchase of insurance policies. Structuring your business properly will make it a separate legal entity from you. However, whether or not a business structure protects you and your personal assets depends on the situation, the type of business you are in, and other laws and regulations which apply. You can’t assume that just because you have a corporation or an LLP that you and your assets will be protected in all instances.
If you are a sole practitioner, you are your business and your business is you. If you form a business corporation, your business will be a separate legal “person.” You will have additional paperwork to do. In addition to meeting federal tax requirements, you will have to be sure that your information on file with the state is current, your “entity books” are updated regularly, any required annual statements are filed, and your franchise taxes are paid in a timely manner. Failure to do these things can result in forfeiture of your status. We have our clients docket the important dates on their business calendars and return to us yearly for a review and update, usually between Jan and April.
Any business entity that is formed must comply with all laws, If you are in a profession which requires a license you will need to be aware of restrictions on what a business may be named, what form of organization may be used, what types of licensed professionals are allowed to practice together, and whether or not an entity may include non-licensed individuals as principals.
If these additional requirements help you save money, protect your assets, grow your business, and stay out of legal trouble, the time that you spend will be well worth it.
Talk to a business attorney about the types of options available to you. Explain your current status, your short-term and long-term business and financial goals. Adequate planning and preparation is the key to success.
To get the most out of your consultation, make a list of your goals and a list of your questions. A summary sheet which describes your business (length of operation, industry, owner/partner information, financial status) will also help the attorney in analyzing the situation.