With the recent reduction of the corporate tax rate, will small business owners in San Diego, California change the structure of their businesses? In some cases, the change from a limited liability company (LLC) or a Subchapter S corporation (S Corp.) to a C corporation may be in the works.
Many small businesses are organized as an LLC or an S Corp. to obtain tax advantages. With these companies, the owners receive the benefits of a corporation, such as liability limitations and corporate structure, but also avoid paying a corporate tax on profits. In these organizations, profits flow through to the shareholders or members, who then pay tax at their individual rate.
With changes in federal tax law, the new 21 percent rate will be far lower than the individual tax bracket for many of these small business owners. As such, converting to a C corporation may make economic sense.
A plan to convert to a C corporation has other factors that most businesses must consider. First, the corporation may be required to pay dividends to shareholders out of the company profits. Shareholders must then pay taxes on the dividends received. This form of double taxation is one of the reasons that many companies chose to organize as an LLC or S Corp. Second, if the tax savings is minor, administrative fees could offset any potential tax savings.
Third, the company must be permitted by state law to change the corporate structure quickly and efficiently. Fourth, the tax status of the major shareholders or members must also be considered.
For those business owners considering a structure change, a consultation with an experienced business association attorney may be a wise move. An analysis of the financial status of the company and its owners may be necessary to determine whether the change is beneficial.