By nature, most entrepreneurs and business owners are goal setters, innovators and challenge seekers. You started with a vision and built a reality. You’ve weathered challenges, opportunities, ebbs and flows. For many, once that first step of business creation is firmly placed, there’s already consideration of what the next one might be.
For many business owners, that next step is an expansion. Whether it’s imminent or a strategic long-term goal, expansion planning is a smart exercise in market knowledge, operational readiness and structural reliability.Let’s start by looking at what expansion really entails. While it certainly impacts revenues, it’s more than a top or bottom line initiative. It could be a strategy to add a product line, division or service, location(s), or to add partner(s) or other shareholder(s) to the organization. Or expansion could take the form of a merger or acquisition.
Expansions often come out of one of two trajectories – planned and carefully managed, or unexpected. In a planned expansion, the process is likely a result of the business owner’s intentional strategies and efforts. On the other hand, if an unexpected expansion happens (due to economic events or interest from a larger entity, for example), what could be fortuitous is more likely to cause irreparable damage to the business. For that reason, whether your business is a lifestyle business or you have expansion goals, it is absolutely vital that you have a solid understanding of your financial entity, tax structure, risk factors and operational structure.
Presuming that you are planning to grow your organization, your first consideration is the structure. You have three main structural options:
- New / separate entity
- Subsidiary of an Existing Entity
- Utilizing a Holding or Parent Company
Of course, each structure will have pros and cons for your business and needs to take into consideration operations, the role of stakeholders, and potential tax advantages. Considering the risks and benefits requires a step-by-step look at how the new entity impacts the current and future state of your business.
The ability to expand with confidence begins with considering seven key questions:
- Are there requirements from interested parties or stakeholders (e.g., lenders, VCs)?
- Do you have any transactional requirements (e.g., international legal requirements)?
- What profit/loss or capital contributions are anticipated from stakeholders’?
- What are your goals for net income as a result of the new entity?
- What is the exit strategy and does the structure align?
- What are the tax implications of your newly formed business structure and is this optimal?
- What are the imminent and long-term risks and liability exposures that should be considered?
Consider how these points are interrelated. It’s wise to elicit the help of an advisor who can help you to answer the questions, weigh your options and prepare the necessary documents for legal filings and accounting structures. An experienced accountant and an attorney need to be part of your team to help you understand the specifics of your current and evolving structure, so you are well equipped to expand with confidence knowing you are not making the potentially expensive mistakes often encountered by businesses that fail to plan.
Whatever business structure you choose for your expansion, the considerations will be varied and specific to you. Are you equipped to evaluate every option? We created S.J. Gorowitz Accounting & Tax Services, PC to support the unique needs of expanding and emerging companies. Over the years, we’ve helped hundreds of these businesses and their owners to make informed decisions and benefit from smart tax planning. You can have confidence in knowing that we can help you too.
Over the coming weeks, we’ll take a more in-depth look at expansion. In the next post, we’ll identify some of the key specifics you should consider (including state international tax compliance, and license and payroll tax issues) and highlight some accounting best practices for managing expansion through new divisions, classes and locations.
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