By Steve Parrish
Once unappreciated, S Corporations now are fueling most of the growth in the small- and medium-sized business market. In fact, according to the Treasury Department, more than 37% of companies with gross receipts over $1 million are S Corps.
Financial representatives who successfully work with S Corps understand their unique needs and undertake a process whereby they can properly devise solutions for the owners.
The successful S Corp advisor applies 3 key principles to help owners assess their financial needs. They are to:
Examine corporate history. A businesss corporate and tax structure history can affect how the owner takes distributions and exits the business. Some S Corps began as C Corps and then changed to S Corps as the owner(s) began to consider leaving the business. These companies typically require special accounting attention to deal with earnings and profits issues.
S Corps that always have been S Corps typically have more straightforward planning options.
Work with professional advisors. Contrary to popular opinion, S Corps are not taxed in a manner identical to LLCs and Partnerships. If the S Corp owners stock interest is a sizeable part of their wealth, the tax and accounting issues unique to their companies must be factored into the owners financial plan. Partnering advisors could point out strategies or information about the company that you might not otherwise have considered.
Incorporate a business continuation agreement into the owners retirement and exit plan. S Corporations are not publicly held companies. Further, their status with the IRS easily can be forfeited if an ineligible party is given stock or if a group of stockholders demands a change to C Corp status. These factors make a written business continuation plan a necessity for the owner who intends to retire eventually or sell while preserving the S Corp status.
Given these principles, experienced financial representatives follow a special process to make sure the unique S Corp issues align with the owners financial needs and strategies. The process not only assures better recommendations but also demonstrates empathy and value to the business owner and his/her professional advisors.
Step 1: Learn the history of the business. Run a search on the Web to see what information is publicly available. The businesss professional advisors are also a valuable source of information. If your client is not sure about the businesss tax status history, ask if the company has filed and/or paid income taxes separately. Also, ask if the company has acquired other companies. The answers to these questions may reveal a previous C Corp status.