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*In a pass-through tax entity, income and losses "pass through" to owners and are taxed by the IRS at the personal level. **In limited-partnership variation, limited partners' liability can be restricted to amount of original investment.

Now what? When Should I Switch?

There are times when a change in corporate structure can bring a growing company all kinds of advantages, such as a boost in the owner's income or greater ease in raising capital. Then again, there are times when a change isn't worth the hassle. Here's a list of factors that may help you decide:

• The company needs capital. If you're simply contemplating raising your credit line or bringing in some informal investors, you can probably stay with whatever structure you've got. But if you're aiming for venture capital or a public stock offering, you'll need C- corporation status.
• You're exploring incentive compensation. A deferred-compensation arrangement will likely mesh with whatever corporate structure you've got. But setting up a stock-option plan will be much easier if you switch to C status. The exception: you can use an S structure if the number of employees covered--plus the number of previous shareholders--doesn't exceed the new 75-owner limit for S corporations.
• The company is profitable and no longer capital hungry, and you're looking to boost your personal income. One quick solution might be to switch from C- to S-corporation status, thus eliminating the double tax on all dividends paid out to shareholders. But don't go this route if you're also contemplating an IPO: you won't be able to revoke your decision for five years.
• You've got great prospects, but the company is still losing money like crazy. Corporate losses, and the tax benefits they can provide, may be more valuable if you switch to a C corporation. That's because, in many cases, S-corporation owners can claim corporate losses only on their personal tax returns up to the amount of their total investment. With C corporations, most losses can be claimed (or carried forward into later tax years) at the corporate tax level.
• You're thinking about adding fringe benefits but are looking for ways to control their costs. It's time to get your accountant to do a cost-benefit analysis. Many fringe benefits for owners turn out to be cheaper with C-corporation status. But don't switch before figuring out whether the cost of double taxation would wipe out any benefits you'd receive from a switch.
• You're diversifying the company into a new business line. Wait! Although switching to an LLC structure is often too costly to make sense for an established business, you might be able to achieve real benefits by organizing your new venture from day one as a limited-liability company.

Did you know that ...

• It's now easier than ever to choose LLC status, thanks to the IRS's new "check-the-box" guidelines. With them, to declare a corporate structure to the IRS, all you need to do is just that. (Before January 1997 companies ran the risk of the tax man stepping in later and reclassifying them as C corporations if they failed to meet key standards.)
• You run a much higher risk of personal tax audits as the owner of an S corporation, especially by revenue-hungry states that audit your company.

Resources

Nobody ever said that corporate-status issues were simple. But here are two good sources of in-depth information: The Essential Corporation Handbook, by Carl R. J. Sniffen, and The Essential Limited Liability Company Handbook, by Corporate Agents Inc. Both are published by Oasis Press (800-228-2275) and cost $19.95 each. While not exactly fun reads, both are full of accessible answers to the kinds of questions business owners typically have. These books are good starting points that can help you prepare for a conversation with your accountant or lawyer.

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