Successful and Effective Tax Planning Series: Why an S Corporation Status for Tommy

This tax planning example is only for illustrative and discussion purposes only. The individuals mentioned in this example do not exist, and if they do, it is only by mere coincidence.

 

Tommy Kid Oil & Gas Fracking Company example

 

To pick up from where I left off on my last post. Tommy Kid, my new client, bought a fracking company for cash and notes, totaling $600,000. I advised Tommy to incorporate as a S. Could I have advised Tommy to operate as a partnership or an LLC (limited liability company) to achieve the same tax consequences as an S. One other question, what if Tommy had inherited (purchase versus inheritance) the fracking business?

Tax planning requires serious thought. The proper business form can result in both nontax and tax advantages. Your business form should be reviewed periodically because your business form at one point in time may not be the proper form at a different time.

In selecting the proper form for a business, Consideration should be given to:

• Contribution of assets to the entity by the owners at the time the entity is created and at later dates
• Taxation of the results of operation
• Distribution to owners
• Disposition of ownership interest
• Termination of the entity

In Tommy's case, he has had very little experience in operating a fracking business but he will operate the business as an active business owner. He only knew that they can make a lot of money, so limited liability is a serious consideration, minimization of income taxes is another. Tommy is single with one dependent. The business earns $1,000,000 before-taxes and $200,000 after-taxes. However, oil and natural gas prices have plummeted since Tommy bought the business, and the cost of doing business has increased substantially due to new EPA regulations. Any after-tax profit will be distributed to Tommy. Tommy is in the 28% tax rate.

In my next post, I will discuss and compare based on the numbers provided in this post what Tommy's numbers may look like under a C Corporation, S Corporation or an LLC.

For a free company consultation, call me at 1-866-801-3359 and ask for Rick.

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