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Entity formation is important even when selling the business

Business owners in New Jersey who are still trying to determine how best to move forward during the structural changes being proposed and implemented by the presidential administration of Donald J. Trump must keep certain factors in mind. This extends to what type of entity formation is best for them, especially when thinking about a near or distant future in which the business will seek a buyout from a larger company.

With the U.S. interest rates having been kept low, economic growth is believed to have been sparked. Along with that, private equity firms sought smaller businesses in which to invest or purchase and take over ownership outright. In the third quarter of 2017, there was an increase of nearly 2,600 business transactions. This is nearly a quarter increase from the same time in 2016. Close to 7,500 businesses were sold overall in 2017 and the prices have also increased. As interest rates may be set to rise, the window for business owners to sell to a private equity firm might be closing as borrowing costs will be higher. There are certain issues business owners must consider if they think about selling out.

The business structure has a great deal to do with the profit that will come from its sale. A C-corporation (or C-corp) will lead to a business being taxed twice, first at the company level and then with shareholder dividends. If it is a service-based company, the S-corporation might be preferable. Much has been said about "pass through" entities with possible changes to the tax code on the horizon. With this entity, the business will avoid corporate taxes. These are important considerations.

Other factors are whether the seller - especially of a small business - will receive enough so they will be protected when they no longer have the same income as they did before or are starting a new business. Calculating what is needed in the future and comparing that with the value of the business and what has been offered is integral to getting an adequate price.

There are multiple other factors that should be weighed when starting a business, selling it and doing anything in between. With any business decision, having legal advice is one of the most essential decisions that will be made. Whether it is to select entity type, consider selling to an equity firm, to expand, or pass the business on to heirs, a legal firm experienced in business is a key to success.

Source: cnbc.com, "This may be the selling opportunity of a lifetime for business owners," Nathan Corbitt, Dec. 7, 2017

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