What’s best tax structure for family business?

What tax structure is best for a family business? Should it be a Limited Liability Company, an S or a C corporation (the S and C simply standing for the section of the IRS code in which they appear), a Family Limited Partnership or a sole proprietorship? Dan Swires, a Lafayette certified public accountant, and Boulder business attorney David Westbrook agree that the proper organization for a family business depends on the circumstances and goals of the owners. No one tax structure fits every company. Dave and Darlene Reidel of Niwot purchased a Molly Maid franchise last July and employ 12 full and part-time people who serve the Gunbarrel, Longmont and North Boulder areas. The Reidel’s house-cleaning business is a sole proprietorship, a structure that works well when the goal of a business is to have the least amount of formality possible, according to Swires.
Picosecond Pulse Labs of Boulder, managed as a family business for 20 years, converted from an S to a C corporation on Jan. 1. Scott Andrews, who along with his father James and sister Susan McMynn own the company, says the company shifted its objectives from being solely an income generator for the family to a company driven by growth. Family members now re-invest their dividends in the company rather than receive a cash income.
This switch required a change in the company’s corporate structure.
One World Arts in downtown Boulder is an S corporation. Owners Jill and Ron Ellis pay personal taxes on their business income, but the corporation pays none. The corporation passes through its profits or losses to its owners, called by the IRS “pass-through” taxation.
Boulder accountant Patrick Peterhans says an S corporation allows family businesses, such as the Ellis’, to avoid a double taxation liability.
Señor T’s in downtown Louisville, owned by Ted and Carolyn Manzanares, opened their restaurant on Main Street in 1972 as a sole proprietorship. After consulting an attorney and their accountant, the husband-wife company converted to a C corporation in 1980 because of its advantages for their family business.
A C corporation allows them to provide health benefits to full-time employees who want it and permits more liability coverage than did a sole proprietorship. The Manzanares’ son Marc is the general manager of the restaurant, and daughter Sherri DiTirro, who waitresses, keeps the daily logs and balances the books.
Each type of tax structure has its own advantages and restrictions. An S corporation, for example, may have no foreign shareholders and no more than 75 members. The owners in a C corporation are protected from personal liability in a lawsuit filed against the business.
A family business’ size might determine whether its members choose to become a sole proprietorship, an LLC, an S or C corporation, or a Family Limited Partnership (FLP).
Ed Wolf of L & L Tax Service of Louisville says that as a general rule of thumb, companies with larger incomes would benefit by forming a LLC because of its flexibility. Business attorney David Westbrook agrees. He recommends an LLC particularly when a business holds real property.
Another advantage of an LLC is that such a partnership protects its members from personal liability for the debts and obligations of the company.
Mail Solutions, a mail processing service that moved from Boulder to Erie in September, is an S corporation, owned by Dennis and Wendy Timmerick and their daughter Tiffani and son-in-law Jason Andryshak. The corporation is governed by a board of directors, and each member of the partnership owns company stock. Profits are split according to the number of company shares each member holds.
Before 1990, Family Limited Partnerships were common. According to Swires, FLPs are often used in structuring investments that can be readily moved to family members for various tax and investment-planning purposes.
Because of the tax code’s complexity, attorneys and accountants, as well as business owners themselves, recommend getting expert advice before making any tax structure decisions.