Why Should You Consider Restructuring Your Business?

Almost a year has passed since the tax changes were enacted under the 2017 Tax Cuts and Jobs Act. Those who were really on top of things took them into consideration in January. Most business owners took a little time, and if you procrastinated, the clock is ticking.

Have you been thinking about how they will affect your business—not just this year but moving forward? Does restructuring your business make sense?

There are two main pass-through entities most startups align with initially. Briefly, pass-through entities refer to entities such as LLCs and S corps. C corps are generally not considered for most.

The Tax Cuts and Jobs Act works well for pass-throughs because of the new 20 percent deduction (through 20250 on qualified business income. A C corp, taxed separately from its owners, has the widest range of deductions and expenses allowed by the IRS.

One thing you may be considering is whether or not it’s time to restructure your business as a result of some of the changes. Many other business owners are wondering whether they should revisit the business entity decisions made when they first organized their businesses. There are several reasons the answers to this question are important.

First of all, it’s wise to periodically change challenge your choice around your chosen entity in general. There are also fiscal concerns. For instance, the changes under the Act are bringing up questions about what entity structures are optimum for tax reduction.

Those who drafted the Act looked carefully and did the math. They crafted provisions with almost the same rate differences between C corps and pass-throughs as existed under the former codes.

The earnings of C corps are taxed once at the corporate level and again upon distribution to shareholders at the individual level. Individual owners of pass-throughs have their income taxed once.

Since 1986, an S corp was the go-to structure for most small businesses. It made sense. But the lower tax rate now being given to C corps, along with other provisions, may have given the blanket decisions once made for startups a little competition. It may be in your best interest to seriously consider organizing as a C corp.

The decision to restructure your business is not to be taken lightly. More than the surface definitions need to be taken into consideration. There are a lot of underlying factors in each strategy. Contact one of our trained tax professionals for advice prior to undertaking important decisions regarding the restructuring of your business.

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