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Converting My Business
Q: I have been in business for about four years and things are going really well. Should I convert my business to an LLC or to a corporation to reduce how much I have to pay in taxes?
A: Congratulations on your success and keep up the good work. Don’t forget that over 70% of all new jobs in this country come from small business owners just like you, so well done. As your business continues to grow there may very well be good reasons to consider different entity forms but a material reduction in taxes is not one of them. At the end of the day the entity form under which you choose to operate will not have a significant impact on your overall income tax liability. Only the underlying economics of your business will dictate your tax liability and not simply choosing a different entity form.
There are certainly pros and cons to each entity form but this should not be a tax decision. Many small businesses choose to operate as an LLC or as a corporation in order to provide some liability protection for their personal assets from potential liabilities of the business. Many choose a different entity form based on the need for raising capital or attracting public investment, and some also choose an entity form based on marketing or the perceived need for a “bigger” name using “incorporated” or “Inc.” But again, other than the increased organization fees and maintenance costs the entity forms will not provide any material tax deductions or tax savings.
Be particularly cautious of entity form specialists who may ‘guarantee’ some level of tax savings solely for converting to a different entity form. If the underlying economics of your business have not changed, then changing entity forms with the sole goal of reducing your tax liability is not a good idea.
As always, don’t forget that you are not alone. Bookmark our website at NASE.org as well as the IRS website at IRS.gov you will always be able to find the help you need.