Choice of Entity After 2017 Tax Reform: Avoiding Tax Pitfalls in Operations, Ownership Changes, Exit Strategies

Description

The 2017 tax legislation made sweeping changes to the tax code, impacting decisions on entity selection upon formation or potential conversion to another entity form. Choosing an entity's legal structure is complicated with new tax laws that include a reduction in the corporate tax rate, a new qualified business income deduction for pass-through entities, new rules on carried interest, and a variety of limitations for counsel to consider.

Choice of entity considerations for startups must involve a planning approach to structuring the company that will enable it to achieve its financial and operational goals. For those that intend to issue stock/options, raise capital, spin-off separate business lines, or deal with the particular issues of cashing out or business succession, the choice of entity at the beginning can have significant tax and operational impact on the business. For pass-through entities that have to navigate the 20% tax deduction and its many exceptions, a company's current or intended activities must be evaluated. For others, a conversion to a C corporation should be an available option as well.

State law is also an important consideration when choosing a legal entity. Some states have different tax rates for various entities and are taking differing approaches on how closely they conform to the new federal tax law for state income tax purposes. The complexities involved in entity selection or conversion require counsel to guide business owners to set up the right type of entity to meet initial goals with the flexibility to change the entity form as the business evolves. Failure to do so can create avoidable tax difficulties for business owners in the operation, liquidation, or succession of the company.

Listen as our experienced panel provides a detailed examination of the tax planning considerations and opportunities in advising clients on choosing a business entity.