C Corp? S Corp? Partnership? LLC? How These Differ and What It Means to Your Clients

Why Should I Know This?

What is the difference between an LLC and a corporation? What exactly is a sub-chapter S corporation, and why would your clients utilize this form of ownership? Our High-Net-Worth/Ultra-High-Net Worth (HNW/UHNW) clients hold their assets in different forms of legal ownership, and we as Financial Advisors need to know the difference. Why?

According to the US Internal Revenue Service, “Your form of business determines which income tax return form you have to file. The most common forms of business are sole proprietorship, partnership, corporation, and S corporation. A Limited Liability Company (LLC) is a relatively new business structure allowed by state statute.” [1]

Your HNW/UHNW clients probably hold assets in different forms of ownership. Self-confidence springs from knowledge of your business. When it comes to serving the whole client, we as Financial Advisors add value and build our confidence by understanding the difference between forms of ownership. These are very significant details, and we need to understand them.

Cannon doesn’t give legal advice. Dispensing such advice is the work of our many clients who are attorneys. We call your attention to legal issues that you as a Financial Advisor should be familiar with because you will undoubtedly encounter these with your HNW/UHNW clients.

Often they don’t know or have forgotten why they are holding assets in different ways. If they don’t know, this gives you the opportunity to make a referral to an attorney or accountant who specializes in this area.

Assets Incorrectly Titled

Another reason you need to know something about forms of business ownership, or asset ownership, is a subject we have been teaching at Cannon for decades because of its importance. Trust and estate attorneys and trust officers know what happens when a client passes away and assets are not titled in such a way as to fulfill the wishes of the deceased.

Various claimants to the estate will often retain attorneys. Sometimes there is arbitration, sometimes litigation. Previously harmonious relationships can end badly. In other words, it can be a train wreck.

Common Forms of Business Ownership

According to the Internal Revenue Service: “The most common forms of business are the sole proprietorship, partnership, corporation, and S corporation. A Limited Liability Company (LLC) is a business structure allowed by state statute.” This last sentence is important; we will review it in a separate article. [1]

A sole proprietorship is exactly that, a person who owns an unincorporated business. You pay taxes on the income as an individual taxpayer.

A partnership is a pass-through form of business ownership. Under most circumstances, the partnership itself isn’t taxed. The income passes through to the individual partners, and they are taxed on that money.

The traditional form of business entity that most of us are familiar with is a C corp which is a separate legal entity from the shareholders who own the company. Your liability is limited to the money you have invested. If you are an investor in Consolidated Widget, Inc. and it goes bankrupt, you will lose your investment but will not be liable for any debts of the corporation. Most large businesses are incorporated as C corps.

Another form of ownership you will often encounter is an S corp or more formally, sub-chapter S corp. Similar to a partnership, the S corp itself is not a taxable entity. The income flows through the S Corp to the shareholder(s). The shareholders pay income tax on the income which is passed through to them.

Nothing is easy, and there are rules and restrictions which govern all forms of business ownership. The IRS code spells out rules and restrictions on all forms of business ownership, and they have a very user-friendly website. This link will take you to the IRS page on business structures that explains the details of each one.

Resource(s):

[1] https://www.irs.gov/businesses/small-businesses-self-employed/self-employed-individuals-tax-center#structures

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Contributing Writer: Subject Matter Expert Charles McCain