They do not get to deduct dividends paid to their shareholders, and their shareholders in turn must report and pay income tax on those dividends.This is commonly referred to as “double taxation.” S corporations, on the other hand, are tax reporting entities.When a closely held business is a significant part of a client’s estate, as is often the case, business succession planning becomes an important part of the client’s estate planning.

liquidating business issues-89liquidating business issues-29

They are: first, what kind of business entity is involved; second, how is the entity classified for income tax purposes; third, who are the current owners; and fourth and finally, what would the client like to have happen (a) if the client lives to a normal healthy life expectancy or (b) dies early or becomes incapacitated. They are: * Corporations, which includes professional corporations and associations organized to practice a licensed profession (such as law or medicine); * General partnerships, which includes unincorporated associations, investment clubs and limited liability partnerships (as distinguished for “limited partnerships” discussed below); * Limited partnerships, which includes professional limited liability partnerships; * Limited Liability Companies (LLCs), which includes professional LLCs; * Sole proprietorships, which really are not separate entities at all, just the owner “doing business as”; and * Trusts, which may or may not be treated as separate taxpayers for income tax purposes. Knowing the type of business entity involved sometimes does not answer how it is treated for income tax purposes.

How much the client’s interest is worth may also be an inquiry to determine how critical planning for the business is to the prospects for success of the client’s planning. Corporations Corporations are taxed under Subchapter C of Chapter 1 of the Internal Revenue Code (called “C” corporations) unless they elect to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code (called “S” corporations).

C corporations are tax paying entities, just like individuals.

They report their income to the IRS each year and pay tax on the net income after deductions.

With careful guidance from the advisor team, the client can be encouraged to focus on the more distant future to do what is possible to preserve the legacy that the business represents, rather than simply closing the doors when the owner is not longer able to run the business.

Planning Tip: This is where the client’s spouse and family may have goals of which the client is unaware.Such a trust is sometimes referred to as “intentionally defective” or an “intentional grantor” trust. If a corporation or LLC has any owner who is not a U. citizen or resident, it cannot be an S corporation.So, too, if some of its owners have one kind of income right that others do not, the S election is not available to the entity.In this issue of The Wealth Counselor, as we continue our discussion of business succession planning begun in a previous issue, we will look more closely at the income tax issues that must be considered during discussions of a sale or transfer of a closely held business.Basic Inquiries On learning that the client owns an interest in a closely held business, there are four basic things the advisor team has to know before it can give the client advice.Planning Tip: Although both partnerships and S corporations are tax reporting entities, the rules applicable to them are quire different.