Business Planning – Entity Structures, Taxes, Succession Planning, and Philanthropy

Dear Valued Clients and Friends,

It’s great to see U. S. companies reporting some of their strongest earnings growth since the 2008 recession. This is no doubt a result of productivity, good management, lower tax rates, deregulation, and a strong global economy. One company, Apple, became the first U.S. company to surpass $1 trillion in market value. To understand how much $1 trillion dollars is, I thought it would be fun to give a few examples of what you could do with it:

  • Spend at least $68 million a day for 40 years, or give each person on the planet a check for $133,
  • Stack $1 bills to a height of 67,866 miles – ¼ the distance to the moon,
  • Get a life annuity that pays $6 billion per month, or you can pay $1 per second for 31,688 years,
  • Buy 334 tons of apples filling 2 million railcars that would wrap around the earth, or
  • Send 1.4 billion Apple iPhones to every person in China, or
  • Start with a penny and double your investment every day. On the 48th day, you will have another trillion dollars.

According to the 2018 U.S. Trust Insights on Wealth and Worth survey, about two-thirds of business owners used family money to start their businesses and about two-thirds of those businesses have family in senior or middle management. The survey goes on to say that while business owners value family member competitive advantage, they acknowledge the challenges of family dynamics, the next generation’s interest in running the business, and how to groom family for leadership. The survey also lists the top ten challenges to business growth. Five of the top challenges were attracting talent, retaining key employees, regulatory costs and compliance, scaling up operations, and complying with employment laws and regulations. The survey further points out that 70% of business owners continue to invest in their businesses, plan to expand products or services, and also plan to expand into new geographies. The last key area of the survey covers succession planning and points out that more than half of all business owners (and two-thirds of large corporate owners) plan to exit their businesses within the next five years. Another interesting observation is that while two-thirds of all business owners have a business succession plan, only one-third have a “robust, documented plan” that has been communicated.

As business owners and prior Fortune C-level executives, our team of professionals have a wide range of experience in banking, deferred compensation, retirement planning, investment banking, business insurance, valuations, succession planning, legal, corporate governance, and philanthropy. As a tribute to business owners, we focus this month’s issue of The Financierge on some of our perspectives in business planning.

The Financierge – Issue #6

  1. Business Entity Structures and New Tax Law Considerations
  2. Five Charitable Planning Perspectives to Know Before You Sell Your Business
  3. Two Estate Planning Tips for Your Businesses
  4. Four Strategies to Preserve Your Business’ Future

Appendix – The Financierge Topical Index (by Publish Date)


Business Entity Structures and New Tax Law Considerations

There’s no one-size-fits-all answer when deciding how to structure a business. The optimal choice depends on many factors including your business and personal income, liability, taxes, and estate planning. Here are four basic entity structures and their advantages and disadvantages:

  1. Sole Proprietorship – In a sole proprietorship, the owner operates the business and has the advantage of no legal formalities, income and losses are filed on a Schedule C, 100% of medical insurance premiums can be deducted, and there is the availability of pension plans (SEP, Keogh). A sole proprietorship also has the disadvantages of unlimited liability and a capital structure that depends on personal resources.
  2. Partnership – In a partnership, two or more owners carry on the business for a profit under an oral or written partnership agreement. The advantages and disadvantages are like a sole proprietorship in that income and losses are filed on a Schedule C, 100% of medical insurance premiums can be deducted, and partners have the availability of pension plans (SEP, Keogh). A partnership also has the disadvantages of unlimited liability for acts of the partnership and a capital structure that depends on partner resources.
  3. Limited Liability Company (LLC) – In an LLC, you may be classified for Federal income tax purposes as a partnership or corporation. You are classified as a partnership if you have no more than two of the following corporate characteristics – centralization of management, limited liability, continuity of life, and free transferability of interests. In an LLC, ownership interests, the disbursement of funds, capital structure, and other operating items are governed by a contract among the LLC owners and governed by state law.
  4. Corporation – For a corporation, there are two basic structures: a regular C corporation or a subchapter S corporation. In a regular C corporation, taxes are filed separately on a Form 1120. If a corporation distributes after-tax earnings to it owners, the distributed income is taxed a second time at the owner level (double taxation). The advantages of a regular C corporation are that it is a separate tax entity, a stock can be sold to an unlimited number of investors, and there is a limited liability to individuals. There is also continuity of life and a 70%-100% deduction for dividends received depending on how much of the distributing corporation is owned. Disadvantages include corporate formalities, dividends paid (after-tax), and accumulated earnings beyond certain limits that are subject to double taxation. In a subchapter S corporation (S Corp), taxes are filed on a Form 1120S and passed-through to shareholders. The advantages of an S Corp include limited liability, and that income and losses (up to basis) pass-through to an owner.  Disadvantages include corporate formalities, limitations on the sale of stock, and other eligibility requirements for shareholders.

Another important consideration in deciding on an entity structure is the new tax law. For tax years 2018-2025, the Tax Cuts and Jobs Act (TCJA) changed C corporation federal income tax rates from 15%-39%, to a flat 21% on any income. The TCJA also lowered both individual taxable income brackets and tax rates from 10%-39.6% to 10%-37%. Therefore, it is important to estimate your personal income, business income, and dividends to determine the most viable entity structure for your taxes. In some cases, it may be better for an individual in a high tax bracket to form a C corporation. Likewise, if profits are retained to grow your business, a C corporation may be preferred if it qualifies as a small business because some or all the capital gains may be excluded for stock sales. The TCJA also benefits non-corporate owners of pass-through entities by allowing a deduction equal to as much as 20% of qualified business income (QBI), subject to phase-out income limits. If significant QBI deductions are available, a pass-through entity will generally be preferred to a C corporation.  Also, if you are a business owner of a pass-through entity, you may be able to lower your income to get below the QBI phase-out limit. This can be done through deductions for IRAs, 401(k)s, SEPs, SIMPLEs and defined-benefit plans. For example, if you are a married individual who owns an S Corporation with QBI of $350,000, you will be over the threshold amount and unable to take the 20% deduction of QBI. However, if you set up a 401(k), SEP, or profit sharing plan and defer $55,000 (2018 contribution limit for under age 50), you could lower your income and take part of the 20% QBI deduction. With a defined benefit plan, you may be able to take a bigger contribution deduction and lower income to take all of the 20% QBI deduction. This is a worthwhile strategy to allow you to lower taxable income, save and grow retirement investments tax-deferred, and protect your assets from creditors.

There are many considerations in making the right entity structure. Our team of professionals can help you evaluate your alternatives and create the right strategy for you.

Five Charitable Planning Perspectives to Know Before You Sell Your Business

Selling your business is a complex task and a time when you need comprehensive, holistic wealth management that includes both legacy and charitable planning.  If your business is private, donating privately held business interests can be an effective and tax-efficient way to achieve tax savings, charitable giving, and legacy planning goals. A donation of a business interest provides a fair market value charitable tax deduction and the charity gets the full amount. Here are five charitable planning perspectives to consider before you sell your business:

  1. Plan Early – If you plan on donating privately held, non-publicly traded assets to a charity, planning conversations must start early. This will allow the legal transfer of your business interests to the charity without impacting the sale or maximum tax benefit. In one instance, a client contributed some of the shares of his business to a donor-advised fund (DAF) before the business was sold. Once the business was sold, the proceeds funded that DAF and the donor was able to provide ongoing support to the family’s favorite charities.
  2. Make Sure Paperwork is in Order – Ensure that all entity agreements (shareholders’ agreement, LLC membership agreements, limited partnership agreements) are reviewed to see whether shareholders, partners, or members, and the charity are subject to business interest transfer restrictions. If transfer restrictions exist, amendments, approvals, or waivers may be required to complete the charitable transfer.
  3. Be Mindful of Valuation Requirements – If there are non-traded securities, they will most likely require a qualified valuation from an independent, third-party to validate the charitable tax deduction. Valuations take time and need to be completed no earlier than 60 days before the date of the charitable gift, and no later than the due date of the tax return in the year the charitable gift is given.
  4. Select the Right Charitable Giving Strategy – There are many charitable giving strategies including direct gifting, private foundations, charitable remainder trust, or a public charity sponsoring a donor-advised fund (DAF) program. It is important to understand the differences so that you can select the right giving strategy. For example, if you donate directly to a charity, you will generally be able to deduct the fair market value up to 30% of your adjusted gross income (AGI). If the charity doesn’t have the experience to handle compliance and liquidation work of the non-cash contribution, the costs could be significant. While you still get the fair market value deduction, the net proceeds committed to the charity could be significantly reduced when compared to giving through a DAF. If you donate to a private foundation, they most likely have the expertise to accept business interests, however, your tax benefit will be lower because a contribution to a private foundation is generally deductible to a maximum of 20% of your AGI at the lower of the original cost basis or fair market value. Contributions of most non-publicly traded assets, including privately held business interests, to a DAF or other public charity, are generally deductible up to 30% of your AGI. Also, with a private foundation, you can’t give anonymously. If you donate business interests to a public charity with a DAF program, it can be advantageous when you consider cost, flexibility, simplicity, expertise, and tax benefits to the donor. DAFs provide an immediate income tax deduction, contributions immediately qualify for maximum income tax benefits (cash up to 60% of AGI, and securities and other appreciated assets up to 30% of AGI), a five-year carry-forward for unused deductions, no capital gains tax on gifts of appreciated assets (e.g., securities, real estate, other illiquid assets), are not subject to estate taxes, grow tax-free, your contribution reduces your AMT impact, and a DAF allows you to recommend grants anonymously to many qualified charities over time.
  5. Use Trusted Advisors – It is important to use a holistic wealth management team with expertise in donating business interests in order to successfully and efficiently manage the process and make charitable donations when you sell your business.

Reach out to your wealth management advisor to learn more about how our team can you transfer non-publicly traded assets into maximum charitable giving.

Two Estate Planning Tips for Your Business

As a business owner, it is important to consider your business in your personal estate planning. The right strategy can reduce taxes, avoid probate, and ensure the continuity of your business. Here are two estate planning benefits for your business.

  1. Tax Reduction – There are many estate planning strategies that can help you reduce taxes. Some of our clients use a Grantor Retained Annuity Trust (GRAT) to transfer business assets to children while still keeping their ability to generate income. A properly structured GRAT can also ensure that as your business appreciates in value it will not be subject to high taxes. For you to obtain the estate tax benefits of a GRAT, you must outlive its terms, usually 10 years. Some clients also use an Irrevocable Life Insurance Trust (ILIT) to mitigate taxes if they do not outlive the GRAT. The ILIT creates insurance proceeds to create liquidity and pay estate taxes. Still, another estate planning technique to reduce tax is a family limited liability company or a Family Limited Partnership (FLP). An FLP can hold the business assets while some units can be transferred to successors without taxation. Also, interests in limited partnerships do not allow for control of the partnership, so the value may be transferred for gift tax purposes. Another estate planning technique allows a business owner to transfer a concentrated stock into a source of income and charitable gift using a Charitable Remainder Unit Trust (CRUT). The business owner had a significant position in low basis company stock representing 75% of his net worth. They established the CRUT with some of the stock, sold and diversified the portfolio to reduce risk, named a charity as the remainder beneficiary, took an immediate income tax charitable deduction, and increased cash flow without capital gains tax.
  2. Business Continuity – Estate planning can also ensure your business continues to operate and there is a transition to the next generation through succession planning. A succession plan will direct the orderly transfer of the management of the business as well as the transfer of ownership. As part of the succession plan, you can also create a buy-sell agreement. This is beneficial when there are multiple co-owners, as it allows the other owners to automatically purchase the deceased owner’s interest in the company. It also prevents a beneficiary of a deceased owner to unintentionally become an owner of the business. In the next article, we will talk more in-depth about business continuity and succession planning.

Four Strategies to Preserve Your Business’ Future

Without the right strategic planning, funding, and execution, your business may fail to survive or transition to the next generation. Here are four strategies to preserve your business’ future: 

  1. Key-Employee Insurance – It is important to protect your business from the death of a key employee whose knowledge and contributions are invaluable, and their loss would impact sales, brand value, key relationships, credit, or goodwill. One strategy is to implement a key-employee insurance plan. In this strategy the company purchases and owns a life insurance policy on the life of a key employee. In the event of a key employee’s premature death or disability, the insurance offers liquidity to keep the business running by hiring additional human capital and/or replacing lost profits.
  2. Business Succession Planning – When you have a successful business, it is important to plan for the transfer to the next generation through a buy-sell agreement. The benefit of a buy-sell agreement is that it guarantees a market for the business interest, creates an estate tax value of the decedent’s business interest, provides liquidity for the payment of death estate taxes, ensures the will remain with surviving owners, and makes the business a better credit risk. The first step in creating a buy-sell agreement is to determine how the business will be valued (optimally done by an outside valuation company) and how business interests will be transferred to surviving owners in the event of an owner death, disability, retirement or deadlock (disagreement on a critical business decision). The second step is to make sure the buy-sell agreement is funded. Generally, there are two types of buy-sell agreements, a Cross-Purchase (Shareholder) Buy-Sell Agreement and a Stock Redemption (Entity) Buy-Sell Agreement. With a Cross-Purchase agreement, each business owner has a life and/or disability insurance policy on each of the other business owners based on each business owner’s share of the business. In this way, there is a buy-out of the deceased owner. This option can be cumbersome with multiple owners. A more practical solution is the Stock Redemption Agreement. With a Stock Redemption agreement, the business owns a disability and/or life insurance policy on each business owner. Upon death or disability, insurance proceeds are paid to the business and the business buys-out the deceased owner. Business succession for families can be a bit more complex and may require consideration of how to equalize inheritance among heirs not involved in the business using succession trusts.
  3. Executive Benefit Plans – Another strategy you can use to preserve your business’ future is an Executive Benefit plan. This strategy is used to attract, retain and reward key employees of the business. There are generally two main types of plans, an Executive Bonus Plan (EBP) and a Restricted Bonus Plan (RBP). In an EBP, the company pays a bonus to the key employee in an amount equal to the annual premium on a life insurance policy owned and insured by the employee. The employee, as the owner of the policy, has the right to name beneficiaries of the policy, access tax-free cash values, and the policy can even include a long-term care rider. When the EBP has a vesting schedule to retain the employee, it becomes restricted or an RBP.
  4. Deferred Compensation and Supplemental Executive Retirement Plans (SERP) – Employees are limited to the amount they can contribute to a qualified plan, like a 401(k). In a non-qualified plan, like a deferred compensation plan, employees can save more for retirement. Contributions to the plan cannot be made on a pre-tax basis like a 401(k), but contributions can grow on a tax-deferred basis like a 401(k). The amount that can be contributed to a salary deferral plan is unlimited and sometimes the company may match the contribution. A SERP is another type of non-qualified plan whereby the company makes all the contributions on behalf of the executive. When the employer makes the contributions to the plan, they are non-deductible. However, when the benefits are paid out, the employer gets the tax deduction and the employee pays taxes as the benefit is received. These types of plans generally have vesting schedules when the company matches contributions and are used as an incentive to retain employees.


Thank you and we hope you enjoyed some of our perspectives in business planning. Please let me know if the is anything our team can do to serve you. Have a great month ahead.

Warm and best regards,

Don B. Saulic, CFP® CPA

Partner, Private Wealth Management

Appendix – The Financierge Topical Index (by Publish Date)

Business Planning

Business Entity Structures and New Tax Law Considerations (Aug 20, 2018)
Five Charitable Planning Perspectives to Know Before You Sell Your Business (Aug 20, 2018)
Two Estate Planning Tips for Your Businesses (Aug 20, 2018)
Four Strategies to Preserve Your Business’ Future (Aug 20, 2018)

College Planning
Five Ideas about 529 College Savings Plans (Nov 2, 2017)

Charitable Planning
Twelve Charitable Planning Ideas to Reduce Income Taxes in 2018 (Feb 14, 2018)
Five Charitable Planning Ideas (Nov 20, 2018)

Estate Planning
Five Annual Estate Planning Tasks (Nov 2, 2017)
Four Components of a Wealth Legacy Plan (Nov 20, 2018)


Investment Planning
Dividend Stock Investing (Feb 14, 2018)

Lifestyle Planning
Six Items to Keep in Your Vault (Nov 16, 2017)
Twelve Proactive Tips to Fight Identity Theft (Nov 16, 2017)
Twelve Ideas to Guard Your Family in a Digital World (Nov 16, 2017)
Is Your Lifestyle Balanced and in SHAPE? (Nov 20, 2018)

Real Estate Planning
Four Points to Ponder Before Buying or Leasing a Home (Jun 22, 2018)
Six Considerations About Mortgages, Refinancing and Taxes (Jun 22, 2018)
Five Elements of Reverse Mortgages (Jun 22, 2018)
Four Perspectives to Consider in Deciding to Move to a State with Lower Taxes (Jun 22, 2018)

Risk Management and Insurance Planning

Starting Social Security Benefits – Ready, Set, Hold!? (Nov 2, 2017)
Nine Considerations to Maximize Social Security Benefits (Nov 2, 2017)
Lifestyles of the Affluent and Exposed (Nov 16, 2017)
Eight Benefits of Health Savings Accounts (Mar 16, 2018)
Seven Ideas for Life Insurance (Mar 16, 2018)
Six Considerations About Long-Term Care Insurance (Mar 16, 2018)

Retirement Planning

Starting Social Security Benefits – Ready, Set, Hold!? (Nov 2, 2017)
Ten Things to Know About IRAs and Saving for Retirement (Feb 14, 2018)

Tax Planning
Twenty New Tax Reform Bill Changes (Feb 14, 2018)



The Bahnsen Group is registered with HighTower Securities, LLC, member FINRA and SIPC, and with HighTower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through HighTower Securities, LLC; advisory services are offered through HighTower Advisors, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.

All data and information reference herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary, it does not constitute investment advice. The team and HighTower shall not in any way be liable for claims, and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.

Third-party links and references are provided solely to share social, cultural and educational information. Any reference in this post to any person, or organization, or activities, products, or services related to such person or organization, or any linkages from this post to the web site of another party, do not constitute or imply the endorsement, recommendation, or favoring of The Bahnsen Group or Hightower Advisors, LLC, or any of its affiliates, employees or contractors acting on their behalf. Hightower Advisors, LLC, do not guarantee the accuracy or safety of any linked site.

This document was created for informational purposes only; the opinions expressed are solely those of the team and do not represent those of HighTower Advisors, LLC, or any of its affiliates.

About the Author

Don B. Saulic

Managing Director, Partner

Don is a Partner in the team’s Private Wealth Management practice specializing in helping affluent families develop comprehensive strategies for all phases of wealth accumulation, preservation, and transfer.

He also leads our Financial Concierge Services platform of professional alliances and serves as the editor of The Financierge.

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