How To Maximize Your Return, As Owner, From Your Business


Techniques to allow owners of S and C Corporations to take profits out of the business for owner’s benefit;  Merits of S and C Corporations and Change from C to S Corporation

The CEO Forum of Commonwealth Institute, March 10, 2010

By Robert A. Adelson, Esq.

  1. Taking Money out of S Corporation
  • S Corp Distributions in lieu of CEO Salary
  1. i.      Single level taxation
  2. ii.      S Corp dividends not self-employmt earnings
  3. iii.      Avoidance of 15.3% payroll taxes
  4. iv.      IRS can re-characterize dividends
  5. v.      9 Factors on reasonable compensation
  6. vi.      Cases and Treasury Study
  7. vii.      Documents to support determination and reasonableness
  • Pass-through gains on asset sales
  • Pass-through losses
  1. Taking money out of C Corporation
  • Maximize salary/bonus compensation
  1. i.      Avoid double taxation of large profits (though not so severe)
  2. ii.      Same issues on unreasonable compensation
  • Pay dividends, if profit is small or retained
  1. i.      Utilize skinny graduation of Corp . rates
  2. ii.      Utilize retained earnings to payout dividends  at current low capital  gains rates
  1. Taking money out of both S & C Corporations
  • Income splitting with family members
  1. i.      Utilize their low tax brackets
  2. ii.      Limited by Kiddie tax
  • Lease of business assets to corporation
  • Coordinate andmaximize entertainment, travel and conference expenses
  • Vehicle, home office and equipment reimbursement
  • Age weighted profit sharing plans
  • Other Employee Benefit or Fringe Benefits plans
  • Thinning new corporation by use of debt and corporate loans to owner
  • Stock redemptions of owners
  • Employee stock ownership plans
  • Tax free separations and divisions of the business
  • Charitable trusts on sale of stock to avoid capital gain on stock sale, to achieve life-time income from sale of stock and receive an immediate charitable deduction as well
  1. Avoidance Constructive Dividends

Red Flags in Audits

  • Payment of benefits to owners
  • Payment of debts, personal expenses of owners
  • Bargain sales of property to owner
  • Bargain use of company property
  • IRS determined unreasonable compensation
  1. Which is better: S Corp or C Corp?
  • Merits of S Corporation
  1. i.      Single level of taxation
  2. ii.      Pass through of tax gains/losses
  3. iii.      No accumulated earnings tax
  4. iv.      Avoidance pay roll tax
  5. v.      Single level tax on sale on liquidation of business
  6. vi.      Ability to allow future acquirer a favorable Section 338(h)(10) election
  • Merits of C Corporation
  1. i.      Accumulation of income without immediate shareholder tax
  2. ii.      Ability to have complex capital structure (i.e. preferred stock)
  3. iii.      Ability to have foreign shareholders
  4. iv.      Ability to be a public company (i.e. unlimited number of shareholders)
  5. v.      Ability to use fiscal year
  6. vi.      Ability to use Section 1202 stock
  1. Change from C to S Corporation
  • BIG – Built In Gain Rule
  1. i.      Asset sales – tax gains on corporate level for  10 years after change
  2. ii.      Taxed at highest corporate rate
  3. iii.      Need for valuation in connection with change
  • LIFO inventory recapture tax
  • Excess Net Passive income tax
  1. If accumulated E &P
  2. Over 25% gross receipts passive income

iii. Loss of S election if 3 consecutive years

About The Speaker

These materials were prepared by Robert A. Adelson, Esq., Partner at Engel & Schultz, LLP, 265 Franklin Street, Suite 1801, Boston, MA 02110, (617) 951-9980, fax: (617) 951-0048, e-mail: radelson@engelschultz.com

Mr. Adelson is a graduate of Boston University, Phi Beta Kappa, and Northwestern University Law School in Chicago where he was a member of Law Review. He has an LL.M. degree in Taxation from New York University, and is a member of the Massachusetts, New York and U.S. Tax Court Bars.  He began his legal career in 1977 as an associate at major New York City law firms, first Dewey Ballantine and later Weil Gotshal & Manges, before returning home to Massachusetts in 1985, where he has been a partner at several Boston firms before joining his present firm as senior business law partner in 2004.

Mr. Adelson is specialized in corporate, taxation, business and technology transactions.  In those areas, he frequently represents (1) small companies with their various business needs, including shareholder and employee issues, financing, commericial contracts, intellectual property, joint ventures, mergers and acquisitions, succession planning (2) senior executives, in negotiations over severance, employment, relocation, stock options, compensation and stockholder arrangements, and  (3) consultants – in liability protection, intellectual property protection, trade identification, vendor, client and subcontractor arrangements.

Mr. Adelson’s firm, Engel & Schultz, LLP, is a small but broad service law firm of 6 attorneys in Boston’s Financial District.  The firm complements Mr. Adelson’s work in business and tax law with seasoned attorneys in family, probate, real estate and litigation matters.

Mr. Adelson is a frequent speaker at business forums and Chairman of IEEE Boston Entrepreneurs Network www.boston-enet.org .  Further information on Mr. Adelson’s background and his past published articles is available at his law firm website.  To view many of Mr. Adelson’s past articles, see http://www.engelschultz.com/index.php/category/publications/ or https://robadelson.wordpress.com/

The speaker thanks Bonnie Gorbaty for the invitation to speak to the CEO Forum program of The Commonwealth Institute on the topic of  “How To Maximize Your Return, As Owner, From Your Business”, at the offices of corporate sponsor Citizen Bank, 53 State Street, Boston, MA, March 10, 2010.

© Robert A. Adelson, Esq. 2010.  All Rights Reserved.

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Author: radelson

Robert Adelson has been a corporate and tax attorney since 1977. He began as an associate at nationally prominent New York City “mega” law firms, first at the Wall Street firm Dewey Ballantine Bushby Palmer & Wood and later at the Park Avenue firm Weil Gotshal & Manges. In 1985, Adelson returned home, where he has since established himself as a respected Boston business attorney. He has attained partner at several small and midsize Boston law firms, most recently at Lawson & Weitzen LLP and then Zimble Brettler LLP, where he was a partner from 1994 to 2004 before becoming a partner at Engel & Schultz LLP.

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