When should you talk to a CPA about changing your business structure?

The business is making meaningful profit

Not a revenue number. Profit is what gets taxed, and once there is real, repeatable profit, the differences between structures start to matter. Bring a full year of monthly P&Ls so the conversation is about your numbers, not someone else's.

You're considering an S election

The election has eligibility rules, a filing window and a reasonable compensation requirement for owners who work in the business. Once an election ends, the IRS generally must consent before the business can elect again before the fifth tax year. Model it with a CPA before filing. See S corporationS corporation An S corporation is a federal tax status, not a kind of company you form with your state. An eligible corporation, or an eligible LLC, elects it with IRS Form 2553, and its income then generally passes through to the owners' personal returns..

You're adding or removing an owner

The number of owners changes an LLC's default federal tax classification: one member is disregarded, two or more is a partnership. A new owner can also affect S corporation eligibility. Ownership percentages, buyouts and the operating agreement are the legal side, and they need an attorney.

You're hiring employees

Employees mean payroll, employment tax deposits and returns, and an EINEIN An EIN (Employer Identification Number) is your business's federal tax ID number, issued by the IRS.. Even a single-member LLC that is disregarded for income tax uses its own name and EIN for employment taxes.

You want to pay yourself through payroll

How you can pay yourself depends on how the business is taxed. Partners in a partnership are not employees who get a W-2. In an S corporation, owners who work in the business must be paid reasonable wages before non-wage distributions. In a C corporation, officers who perform services are employees. If you want a paycheck, the tax structure decides how it works.

You're expanding into more states

A location, warehouse, employees or inventory in another state can create sales tax nexusSales tax nexus Nexus is the connection between your business and a state that creates an obligation to register for and collect that state's sales tax. there, and each state has its own rules for out-of-state businesses. Rules vary by state, so check each state's official sources and ask your CPA what changes.

You're buying significant equipment or real estate

Big purchases raise structure questions: which entity should own the asset, how it is financed, and how and when its cost can be deducted. Buying something mainly for the deduction is still a bad trade. See write-offWrite-off A write-off is an ordinary and necessary business expense deducted from income, which reduces taxable profit. It does not make the purchase free..

You're bringing in investors

Investors change ownership, control and possibly eligibility. An S corporation can't have corporations or partnerships as shareholders and can have only one class of stock, which may not fit how an investor wants to own a piece. This is where a C corporationC corporation A C corporation is a corporation taxed as a separate taxpayer under the regular corporate rules, which is how a corporation is taxed unless it elects S status. The corporation pays federal income tax on its profit, and shareholders may pay tax again on dividends. sometimes comes up. Have the CPA and attorney conversation before any money changes hands.

You're taking on significant debt

A large loan or line of credit raises questions about which entity borrows, which assets secure it, and who signs a personal guaranteePersonal guarantee A personal guarantee is a promise that you, personally, will repay a business debt if the business does not.. The answers depend on how the business is structured and who owns it. See business creditBusiness credit Business credit is your company's own borrowing history and reputation, separate from your personal credit file..

You're planning a second location

Some owners put a new location in its own entity. Others keep one company. Each approach has tax, liability, lease and lending consequences that depend on your state and your situation. Decide before you sign the lease, not after.

You're considering a sale

A sale raises tax and legal questions that depend on how the business is structured and owned. They are much easier to plan for years before a buyer appears than weeks before. Clean books matter here too: enterprise valueEnterprise value Enterprise value is what the whole business is worth to a buyer, independent of who owns it or how it is financed. is built on numbers a buyer can trust.

What to bring

• Twelve months of monthly P&Ls and a current balance sheet.
• Last year's tax returns, business and personal.
• Formation documents and the operating agreement or bylaws.
• Payroll records, if you run payroll.
• A plain description of the change you're considering and when.