Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question:  My client owns a business with multiple co-owners.  Their attorney has suggested that they create and operate more business entities. Why does that make sense, and how should it affect the owners’ buy-sell plans?

Answer:  It’s hard to know all the reasons that a client’s professional advisers might suggest creating additional business entities.  Any one or more of the following objectives might be relevant:

• Better liability management
• Separating lines of business for tax reporting purposes
• Creating tax management opportunities
• Structuring more efficient ownership

For those situations where tax management is an objective, we often see situations where the business owners should consider creating entities that are taxed differently.  For example, the owners might create one business that is an S corporation, another that is a C corporation and a third that is an LLC taxed as a partnership.

Normally, where there are multiple entities, we suggest that the owners use an LLC or partnership as the conduit for funding and administering the buy-sell for all the companies.  In general, a partnership’s operating agreement can be drafted in a flexible way to accommodate those circumstances.  In addition, the fact that the owners are partners solves transfer for value problems that might arise in certain buy-sell situations.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.