Date: March 9, 2021
Overview
Lucent Leads Media, a lead generation agency in Minnesota, was having a phenomenal first year in business. Unfortunately, what the partners didn’t know had unintended consequences. It turns out they had not chosen an appropriate entity structure when forming their company, and as a result, the two partners were facing a combined tax bill of over $39,000. Their tax exposure was preventing them from growing and scaling at a crucial time. CP&A helped them to reallocate those tax dollars into investments within their company, thereby reducing their tax bills to the IRS and freeing up needed cash flow to expand their organization.
Challenge
It is exciting to start a new venture, and it’s even more exciting when that business explodes right out of the gate. Unfortunately, making small mistakes early on can come back to haunt a business.
That’s exactly what happened with Lucent Leads Media, they didn’t know what they didn’t know and were facing unexpected tax liabilities. When the two partners started their firm, they knew that they had what it took to be successful, but they also knew they’d need some professional guidance and support. That’s when they called CP&A.
Taking Action
Business entity structures have serious consequences, and not fully understanding them when starting a business can have a major impact on future tax bills. Some structures treat all business profits as personal income to the owner(s), while others keep profits separate from personal income and treat the owners the same as any other employee on the payroll. Other entity structures pay their own taxes and are held completely separate from the owners and shareholders.
After reviewing Lucent Lead Media’s situation, potential tax bill, and other aspects of the business, CP&A determined that changing the organization’s entity structure would save them a significant amount of money, at that time and in the future.
We put together a strategic plan to save the partners from being overtaxed and helped them complete and file the regulatory paperwork with state and federal agencies to change the business structure, thereby eliminating the massive tax liability they had been facing. In addition to correcting the business’s entity structure, we found four other opportunities for tax savings that would allow the business to maximize their deductions and increase the partner’s after-tax wealth.
Results
This one change had a profound effect on the partners’ tax liabilities, turning each partner’s $20,000 tax bill into a $600 refund for one and a $1,600 tax bill for the other.
With the company restructuring, CP&A also implemented strategic tax-saving strategies that lead to an overall joint savings of $18,000 in the first year and over a quarter of a million in tax savings in the first five years of the plan implementation. The first-year savings not only paid for the tax plan, but they also received a 4:1 ROI net of the plan fees.
Today, CP&A provides ongoing support and guidance to maximize organizational growth as well as the partners’ after-tax wealth. Since engaging CP&A, Lucent Leads Media has grown their total revenues by 231 percent and increased their total profits by 445 percent while continuing to experience exponential growth. They’ve also decreased their tax exposure by more than 73 percent while expanding their existing team.
We didn’t know what we didn’t know when we started our business, and that really had diminished our after-tax profitability. CP&A not only taught us what we needed to know, but their strategic financial leadership has led to business growth that’s far beyond our expectations. We highly, highly recommend Vanessa and her team.
—Dain Bauman, Partner, Lucent Leads Media