Why is this Topic Important to Wealth Managers? This blogticle discusses the use of business entities in estate planning. It also presents discussion on Corporations and Subchapter S of the Internal Revenue Code. The blogticle provides useful information for wealth managers who work with clients involving business entities in estate planning.

Do your clients’ estate plans include business entities? Many times the average and complex estates alike will include some form of business entity. Whether it’s creating and funding a buy/sell, or starting a new enterprise, business entity issues are peppered throughout the estate planning world. An experienced wealth manager should be familiar with business entities and understanding of corporate structures generally.

Perhaps the most advantageous reason for the use of corporate status is the “corporate veil”, which means that corporate shareholders are not personally held liable to the creditors of the corporation for any of the corporation’s debts beyond the investor’s initial investment. On the other hand, a sole proprietor or partners in a general partnership are personally liable for the debts of the organization. If the business incurs significant debts which the business does not satisfy the question becomes who do the creditors pursue for the money? A traditional corporation is one way to protect personal assets from the liabilities incurred by the business enterprise.

Another advantage of a corporation is the going concern concept. A corporation, unlike a sole proprietorship, is a separate legal entity from its shareholders and will not automatically dissolve upon the death of the owner(s). Succession planning often takes into consideration multiple generations, and the going concern of the business is generally an integral part.

Nevertheless, corporations are not perfect. The most obvious detriment for the use of corporations is the issue of double taxation. The double tax occurs when the corporation is required to pay income taxes on its profits each year; and once distributions are made to shareholders, taxes are levied on the personal income of the stockholder. Therefore, a tax is levied at the corporate level and the personal level on the same income, hence the term double taxation. To avoid this issue Congress in 1958, “acted on President Eisenhower’s recommendation” and created a Subchapter S of the Code.[1] Subchapter S-Corporations have several advantages over traditional Subchapter C-Corporations including the elimination of double taxation.

S-Corporations are “flow through” entities for tax purposes. In other words the profits or losses of the corporation are reported on the individual shareholders’ tax returns each year. The S-Corporation status has gradually gained acceptance since its introduction. Moreover, the S-Corporation Association notes that the number of S-Corporations has increased from 2.7 million to over 4.5 million during the ten year period from 1997 until 2007.[2]

Even so, the election under Subchapter S is applicable only to “small business corporations.” Such a corporation is generally defined as a domestic corporation which:

1. has 100 or fewer shareholders;
2. does not have as a shareholder a person (other than an estate, a tax-exempt organization, or a certain type of trust) who is not an individual;
3. does not have a nonresident alien as a shareholder; and
4. has only one class of stock. [3]

Tomorrow’s blogticle will continue to discuss important planning aspects of 2011.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts.

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[1] S-Corp.org, “S-Corp History” Link.  http://www.s-corp.org/our-history/. Last Accessed 6/17/10.

[2] Id.

[3] I.R.C. §1361(b)(1).

Tags: Business, Corporation, estate planning, Internal Revenue Code, Internal Revenue Service, Limited Liability Company, Sole proprietorship, Tax

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