Since the start of the COVID-19 pandemic, many aspects of business have changed. These can include (in some sectors) the increasing availability of private equity, the burgeoning use of AI, the ongoing difficulties in finding talented personnel, and the shifting of generational goals and ideals. There are many ways that businesses can respond. One way is to switch to a different business structure. Professional partnerships, for example, are one way to remain profitable and sustainable.
Considering Alternatives
Alternatives to traditional business models such as sole proprietorships, S corporations, C corporations, partnerships, and limited liability companies include the following:
- Split-ups. Instead of remaining one entity, a company may consider splitting into separate businesses. For example, a company that manufactures both men’s and women’s clothing could choose to operate as two separate companies, one for each gender. Some companies divide their organization into regulate and non-regulated segments. Splitting a business can attract private equity companies because this allows investors to target specific, interesting portions of the business, or because regulations might force them to avoid investing in the entire venture altogether.
- Employee stock ownership plans. ESOPs are defined benefit plans that have been around for decades and are currently enjoying a renaissance. Essentially, ESOPs are trust funds funded by the business. They can be set up in one of three ways: The employees own the entire company or have a majority or minority stake in it. All eligible participants receive a compensation-based percentage each year, and that percentage is the same for everyone. While ESOPs are not right for all businesses, they give eligible employees a stake in the business. This often fosters loyalty and engagement.
- Benefit corporations. B Corps create for-profit entities to make a social impact on society by merging the traditional for-profit business model with a nonprofit model. In other words, B Corps take a public interest (for example, the environment) into consideration before making business decisions; maximizing shareholder wealth is not their only business goal. But not all states recognize B corps; additionally, proving social benefit can be a lengthy process. Companies in states that recognize B Corps should be sure to register with the state. This ensures they can use the designation in marketing and promotional materials.
Taking the Next Step: Deciding on a New Business Model
Moving to a new business model is not the best answer for every company. If your company wants to consider a change, consulting with professional advisers, including tax advisers, is important. Restructuring a business requires careful consideration. Business owners need to educate themselves about the tax and regulatory implications and be sure the change aligns with the business’s strategic goals, culture, risk tolerance, technological capabilities, and other needs.
We welcome the opportunity to put our accounting expertise to work for you. To learn more about how our firm can help advance your success, don’t hesitate to contact Kathy Corcoran at (302) 254-8240.
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