The CORE Assessment
While it may be unrealistic to predict in advance whether your business may
be the next Starbucks, Microsoft, Toyota or American Express--yes, all of them
started as someone's business idea--it is both realistic and necessary to
understand the capital investment needs of your business and its
possible path toward achieving financial success and meeting your personal
goals. Begin with a CORE assessment of your business's ownership attributes.
The CORE assessment involves analysis of four elements: Capital assessment,
Ownership involvement, Risk factors, and Exit strategy.
Specifically, you should outline the needs of your business in the following
Investment. Does your business require significant investment in
capital equipment or significant working capital to keep the business operating?
A computer consulting service may require little startup capital or investment
in equipment, particularly if you are the only consultant. By comparison, a
computer manufacturing business may require millions of dollars of manufacturing
equipment and substantial working capital to purchase materials and stock
inventory. The need to retain capital in the business will impact your tax
planning and influence your choice of entities for operating your business. In
addition, if you need to attract investors to provide the working capital,
you may need to choose an entity that makes your company more attractive to
|Get to the Core|
C: Capital Assessment
R: Risk Factors
- Ownership Involvement. Will all of the owners of the
business be active in the day-to-day operation of the company? Do you need to
structure the business so that some non-involved owners can receive a return on
their investment in some form other than salary or employee benefits? Who are
the investors and what return are they seeking on their investment? Do your
investors desire some profit distribution each year, or will they be content
with a single return on their investment a few years down the road when they
sell their investment?
- Risk Assessment. What risks are inherent in your business?
Are you manufacturing a product that could (if defective or improperly used)
cause physical injury to your customers or to others who come in contact with
the product? Can the risks involved be adequately covered by affordable
insurance coverage or will some portion of the risk fall on your shoulders? If
your business exposes you to more risk than you can comfortably insure against,
then you will likely choose a form of business entity that protects your
personal, non-business assets (e.g., your personal residence and personal
savings account and investments) from the liabilities of the
- Exit Strategy. Is your business so personal to you--for
example, a single-professional medical office, accounting office, or family counseling practice--that it is
likely to end the day you choose to retire? Alternatively, do you expect to
build a business that will be handed down within the family from generation to
generation? Or perhaps you anticipate that your business will be purchased by
some of your key employees or by an outside third party. Whatever your
expectation, you should select a form of business entity that will likely
minimize the tax consequences of selling, transferring, or simply closing the
Each area will push you in a direction for both tax and business reasons. If
you're lucky, all four will point exactly the same way; but, more likely, you
will be pointed in two or more directions. In that case, you will need to
subjectively weigh the importance of the each of the four factors to your
overall business (and life) plan, and then balance how strongly each factor
pushes you in one direction or the other. More often, one overall structure will
ultimately make sense when you look at the complete tax and business picture.
Occasionally, it will be more difficult to pick between two or more options. In
any event, the CORE analysis will ultimately help you make the most important
single tax decision you will need to make: What form of business entity will you
use to maximize the success and profitability of your business?
W. Rod Stern is a partner at Murtaugh Meyer Nelson & Treglia LLP
specializing in business, tax and estate planning. He has more than 20 years of
experience as a corporate attorney and holds a master's degree in taxation law
from New York University.
Carol A. Brittain has more than 20 years of
experience specializing in business and corporate law. She holds an MBA from
Thunderbird School of Global Management, ranked No. 1 in international business
by The Wall Street Journal. She has taught courses at University of
California Hastings College of the Law.