Businesses May Need Change of Structure

Author: Keith Huggett

So you’ve been operating your business as a sole proprietorship for a while, perhaps even several years, but now you’re wondering if you’ve outgrown this arrangement.

It’s not uncommon for sole proprietors to convert to another business structure as their business grows and needs change.

Your sole proprietorship was easy to set up, and you’re beholden to no one because your business isn’t really a legal entity. On the other hand, you’re personally liable for the whole thing, so your assets are at risk. You have to pay self-employment tax on your profits. And, technically, you have no business to pass along or sell if you die or want to move on.

Now you need additional expertise to develop products or manage the company, or you need more capital to expand. Bringing on one or more partners or becoming a corporation may be the answer. Or maybe you want to reduce your level of risk and you’d feel better-protected by becoming a limited liability company (LLC).

In essence, options other than sole proprietorship include:

• A general partnership. Partners share the burden and the wealth, but a formal agreement is essential.
• A limited liability company (LLC), also easy and flexible. You get the liability protection of a corporation, but you can sidestep onerous procedural requirements.
• A corporation, which offers clear separation of personal assets, tax savings, and the best opportunities for outside investment. But you’ll face lots of formal procedures and reporting.

Whatever you choose, there will be plenty of paperwork involved. And of course there are some costs. But those are temporary – think of them as growing pains.

Is this the right time to switch your business structure?

It’s the perfect time to consult a tax professional. Here at The Tax Office Inc., we understand the nuances of all business types as well as the ramifications for your specific business, so we can help you carefully evaluate the pros and cons of moving beyond a sole proprietorship.

If you’re seriously considering a change, contact us today and let us help you make the right decision.

Making It Personal

Author: Keith Huggett

When you run a sole proprietorship, your business' taxes are your personal taxes. With this in mind, end-of-the-year tax planning is especially important. Here are some tips that can help you minimize your tax bill:

• Compile documentation on your home office and vehicle usage. The IRS lets you write off home office and vehicle expenses, but you will need to clearly identify which portion of each gets used for business purposes and which for personal purposes.
• Set money aside for taxes. While you should have been paying estimated tax payments, you should still be ready in case you owe more money. Keep in mind that your income will also be subject to self-employment tax, which can easily add up to thousands of dollars.
• Accelerate earning money. Right now, 2012 has lower tax rates than 2013, although this could change if Congress extends the Bush tax cuts. With this in mind, 2012 could be a good year to earn income. If it makes sense for you, you might want to shift income to this year and expenses to next year.
• Get your books in order. The accountant or tax preparer who will compile the returns for you and your sole proprietorship will need detailed information on your income and expenses so that he or she can accurately reflect your business' operations. 
• Make capital expenditures. The Section 179 deduction is a generous $139,000 this year and lets you choose to expense instead of depreciate major capital purchases. Since it will go down significantly in the 2013 tax year unless the tax code is changed, this year is an excellent time to buy large items for your business to offset profits. If you combine the Section 179 strategy with shifting income to 2012, you could end up creating tax-free profits.