How it happens
At formation you were solving for cost, speed, and a business that did not exist yet. Somebody sensible recommended a structure appropriate to those facts, and it was the right advice.
Then the business grew, added people in other states, changed what it sells, took on debt, acquired something, or started generating far more income than anyone modeled. The structure did not change, because changing it was never anybody's job.
What drifts
- Classification. The election that suited a business at a few hundred thousand of income frequently does not suit the same business at several million.
- Owner compensation. Set once, indexed by habit, never re-evidenced against what the role would now command.
- The operating and holding split. Most businesses accumulate valuable assets inside the entity that also carries the operating risk, which is precisely the arrangement you would never design deliberately.
- State footprint. Remote staff, customers, and inventory each create exposure. It accretes silently and is usually discovered during an examination rather than during planning.
- Ownership. Equity issued to early people on terms that made sense then and now constrain a transaction.
Why it is worth doing before a transaction
Structural work is ordinary when nothing is pending and conspicuous when something is. Reorganising in the year before a sale invites scrutiny of the reorganisation itself, and several of the more valuable positions require the structure to have existed for some time.
It is also cheaper. Untangling a structure under transaction timetables, with a buyer's counsel watching, costs several times what the same work costs in a quiet quarter.
Where this lands
- 01Map what actually exists. Every entity, who owns what, which holds which assets, and which carries which liabilities. Most owners find at least one surprise.
- 02Test classification against the business as it is now, including a projection of the next three years rather than the last one.
- 03Separate what generates risk from what holds value, if they are currently in the same place.
- 04Establish your real state footprint, and deal with any exposure before it is assessed retrospectively.
- 05Put a review on a cadence. Annually is sufficient; never is what most businesses do.
General information only. This article describes law and practice as we understand them at the time of writing. It is not tax, legal, accounting, or investment advice, it does not consider your circumstances, and it does not create an advisor-client or attorney-client relationship. Odyssey Strategic Advisors LLC is not a law firm and is not a CPA firm. Confirm any position with your own tax professional before acting on it. See our disclosures.