The year 2018 saw the implementation of the Tax Cuts and Job Act (“TCJA”). There are a myriad of changes to the federal tax code – just ask your CPA. One question to ask is whether it makes sense tax-wise to keep or change how your business is taxed. Your CPA and lawyer can help with that decision.
The CPA’s Role: Your CPA should guide you on how the TCJA affect your business, and whether any changes need to be made. The changes could include a change in tax status. You may have elected to have your business taxed as an S-Corp, for example. Maybe it makes sense to keep that, or maybe it makes sense to change its status to a C-Corp. Be careful when making the decision based on what a colleague did or what someone wrote online. What may work well for Jack’s business may be a disaster for Jill’s business.
Keep in mind that there are short deadlines if you want the change to be retroactive to January 1, 2018. Have more than one owner? You may need everyone’s signature to effect a change. Delay may not be your friend.
The Lawyer’s Role: Need to make a change? Changing entity status or tax status, or both? Your lawyer can help guide you on what obligations you have to involve any co-owners, how to properly give notice, and how to take and record a vote. Ignoring that may invite an angry letter and/or a lawsuit by a co-owner, for instance. There could be other legal ramifications based on what agreements your company has in place. Do your due diligence – avoid being penny wise but pound foolish, as the old saying goes.
Starting a New Entity?: The same general advice applies. Speak with your CPA about the tax advantages/disadvantages of your choice of entity and tax status. Speak with your lawyer about the legal aspects.
How About DIY?: Many states make it easy to do the bare bones to create an entity. Some states make it just as easy to file to change an entity, such as converting an LLC to a corporation. There is more that the DIY-er should consider. What obligations do you have with your choice of entity? Should you have a partnership agreement, shareholder agreement, bylaws, operating agreement, buy/sell agreement, subscription agreements, and so on? Which one is the right fit for the entity? What should you have or not have in those documents? Done well, those documents can memorialize what everyone agreed to, provide guidance if there is a dispute between the owners, and maybe help if you get audited by the tax authorities. Done poorly, you risk a harder and more expensive mess that helps your lawyer buy a brand new luxury car.
There are those who can handle all this themselves quite easily. For the rest, get the right help at the right time. Your peace of mind and pocketbook will thank you.