Your guide to helping your clients choose the right entity structure

Choosing the right entity structure is crucial for you to know how to do, because it directly impacts a business’s tax liability and financial health. Understanding tax implications helps optimize deductions, minimize liabilities and ensure compliance, ultimately contributing to the overall financial success and sustainability of a business.

Below, you’ll find a few of the top questions from a recent webinar on the topic and their accompanying answers. If you choose to attend the on-demand version of this webinar, you can access the full recording and the entire list of Q&As.   

Q: Can shares of an S-corp be transferred to children above age 18 without consideration? If so, will future income get taxed in the children’s hand?

A: Yes, in that case, you are looking at a gift of stock shares. Since they are now the owners, yes, they should report their respective share of the S corporation income and losses.

Q: Can a single-member limited liability company (SMLLC) elect to be taxed as an S corporation after Year 1 or Year 2?

A: There is a late election available, granted to be retroactive. The entity should have been treated like it was an S corporation the entire time by the shareholders. Rev. Proc. 2013-30 lists the qualifications for a late S election.

Q: Does §1202 apply to shareholders of a corporation filing Form 1120?

A: No, the election is available to taxpayers (other than corporations) who own stock in a qualified small business.

Q: When do you consider payments to partners as guaranteed payments? For example, each partner transfers $1,000 a week to their personal accounts.

A: When a partner performs services for, or advances capital to, their partnership within their capacity as a partner, and payment for such is determined without regard to partnership income, the payments are “guaranteed payments” [§707(c)]. In that case, if the payments are for services, they should be treated as guaranteed payments. Otherwise, you could be looking at distributions.

To learn more about deciding which entity structure is best, you can watch our on-demand webinar. NATP members can attend for free, depending on membership level! If you’re not an NATP member and want to learn more, join our completely free 30-day trial at natptax.com/explore.