The CORE Assessment

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This has been excerpted from Tax Planning for by By W. Rod Stern and Carol A. Brittain, available from Entrepreneur Press.

While it may be unrealistic to predict in advance whether your business may be the next , , or --yes, all of them started as someone's --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 attributes.

The CORE assessment involves analysis of four elements: Capital assessment, Ownership involvement, factors, and Exit strategy. Specifically, you should outline the needs of your business in the following four areas:

  1. Get to the Core
    C: Capital Assessment
    O: Ownership Involvement
    R: Risk Factors
    E: Exit Strategy
    Capital 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 those investors.
  2. 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?
  3. 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 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 business.
  4. 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 business.

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 .

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.

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