During the planning process, the advisors may determine that the current type of business entity may not be the correct or most efficient one.Changing the business entity must be done carefully and with full knowledge of the tax consequences.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.
The one exception is that in the nine community property states, if the only partners are a husband and wife who file a joint income tax return, they may choose to treat the partnership like a sole proprietorship and disregard its existence for income tax reporting.
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.
Estate planning issues include how to turn the business into cash for the owner’s retirement, who will take over or buy the business from the owner (family members, an outside buyer, employees, key employees, other owners), and how the sale should be structured.