Deciding how to organize a business is a problem that faces the owners of existing businesses as well as new ones.

The choice should not be a static one but should be a reconsidered and perhaps changed as the business grows and its needs change.A profit-motivated business can be organized from a tax perspective in one of three basic ways (not considering sole proprietorships):

* A regular corporation, with its income taxed directly.

* An S corporation, where profits and losses are passed through and taxed to the shareholders.

* A partnership, with profits and losses passed through and taxed to the partners.

While these three choices face anyone who launches a new enterprise, they should be re-examined and reconsidered from time to time by the owners of businesses already in operation.

Among the reasons for reconsideration are:

* A change to another legal form may be desirable as the business grows.

* There may be good reasons for a business to consider creating a subsidiary or placing part of the business in a separate organization owned not by the business but directly by its owners.

* Changes in the tax laws may make it desirable to change from one form of organization to another.

For example, the need to raise equity capital may dictate a change in business form, with choice depending on how many new investors are sought and how much of a management voice is offered to them.

A new venture launched by a going concern may be organized separately and in a different form. A corporation might create a research and development partnership, with the corporation as general partner and its stockholders and new investors as limited partners.

For closely held businesses, important considerations are the maintenance of management control and, as the principal owners approach retirement, the need to transfer both ownership and control to the next generation as part of a carefully prepared financial and estate plan.

Tax considerations are very important in determining the form of a new business, an ongoing business or a spin-off, and changes in the tax law may dictate a change in business form.

The following is an example of business that might change its legal form several times.

Stage 1: The company is organized as a small business corporation and elects S corporation status, so that operating losses can be passed through to the owners and owners' losses on stock can offset ordinary income from other sources.

Stage 2: When the company turns profitable and is growing rapidly, so that it retains and reinvests most of its earnings after owners' salaries and other expenses, S status is terminated, and the business is operated as a regular corporation so that the owners will not be taxed on undistributed earnings.

Stage 3: The company launches a new product or embarks upon a research and development venture that is expected to lose money for two or three years. This new venture is organized as a partnership, with the corporation itself as general partner, so that the losses of the venture can be passed through to the owners. Later, when the venture turns profitable, it can be acquired by the corporation.

Stage 4: The company matures, its growth rate slows, its earnings exceed what is needed for reinvestment, and it begins to pay sizable dividends. Even so, its accumulated undistributed earnings approach the limit on which the excess accumulated earnings tax would apply. It elects S status again, so as to avoid the double tax on distributed income and also the accumulated earnings tax.

Stage 5: The owners decide to go public in order to improve the liquidity of their personal estates. S status is terminated and the company resumes its status as a regular corporation in order to make the public offering possible.

Recent tax legislation has significantly changed the balance of advantages and disadvantages of the three forms of organization. The fully taxed corporation has lost some of the advantages over the other two forms, and the S-corporation requirements and restrictions have been significantly liberalized so that more businesses can use that form.

Further, with the most recent changes in individual and corporate income tax rates and the limitations on the deduction of passive losses, the choice of the form of the business is even more critical, yet complicated.

Scott W. Pickett works for Coopers and Lybrand.