Business 101: Incorporation Strategies
When it comes to corporate structure, Deborah Williams has pretty much seen it all. Hard as it may be to believe, her company, Black Cat Computer Wholesale, in Amherst, N.Y., has gone through three different corporate forms in its first five years of operation. The computer-wholesaling business started out as a sole proprietorship, then became an S corporation, and most recently switched to C-corporation status. Williams admits that choosing the right form for her $7 million company "has been a nightmare, mainly because we grew so quickly that it was tough to figure out just what structure made sense for us.
"I'm an entrepreneur, not an accountant or an expert in corporate structure," she says. "I relied on the advice of accountants who really weren't qualified to advise a fast-growing company." Williams and her current accountant have spent several years undoing mistakes that she now knows could have been avoided with good planning.
Williams isn't alone. Decisions about choosing a new corporate structure are technical and complex, but they can have far-reaching consequences for your business. Business owners can sometimes achieve important results by changing their companies' corporate form--or by using new structures in future ventures. What's more, this area of law has gone through big changes: recent developments include increased flexibility in the rules about S corporations, as well as the growing popularity of limited-liability companies (LLCs). "I see clients all the time who come in and don't even want to think about this--all they want is for me to tell them quickly what's the best corporate form for them," notes Bob Franske, director of small-business services for Boulay, Heutmaker, Zibell & Co., an accounting and consulting firm based in Minneapolis. "But there's no quick answer to that question, even though I have a personal preference for S corps for start-ups. We absolutely need to discuss their goals for the company and all kinds of other issues."
Williams and her first corporate accountant never had such a conversation. It scarcely seemed necessary: she was operating a classic small home-based start-up and had no idea what kind of growth prospects she would face. As a result, she chose the simple sole-proprietorship form. (In fact, her company grew so fast, it made this year's Inc. 500 list of the fastest-growing private companies.) "I hadn't started up a company before, and I was ignorant about how much all this mattered," she recalls.