What type of entity should I incorporate for my first acquisition?

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September 02, 2021

by a searcher from INSEAD in New York, NY, USA

Newbie question - has anyone looked into what type of entity (and which state) to incorporate for the first acquisition esp. when taking on SBA but also hoping to attract investors for future growth? Would anyone recommend any specific states esp. when everyone is working remotely?

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Reply by a searcher
in Alpharetta, GA, USA
One consideration is whether or not you believe the C Corp tax rate will remain at 21%, significantly lower than the LLC or S Corp rate. You mentioned you will be taking SBA financing - a lower tax rate means more after-tax income available to pay down loan principal. I also bought a business with an SBA loan and formed my acquisition entity as a C Corp and am aggressively prepaying principal. After 5 years you can convert a C Corp to an S Corp and that is what I plan to do.

Of course all of the preceding is moot to the extent Biden, Pelosi and Co. are successful in raising the corporate tax rate.

Lastly - it’s great to post on this forum and get free advice, but you should be talking to a CPA who specializes in small businesses and has experience with levered acquisitions.
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Reply by a professional
from University of Minnesota in Minneapolis, MN, USA
From a legal perspective, while the administrative oversight might differ based on the state and entity type, an LLC and corporation offer the same degree of personal liability protection. With that in mind, talk to your investors to find out what kind of preferences they might have, and as Bill Wiersema said above, be sure to have a conversation with your tax advisor, run some models, and make the tax-efficient choice. Every situation is different. Good luck!!
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