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Sidestep tax on personal holding companies

08 Jun 2017 Written by
Published in Blog
 

The personal holding company tax is often thought to be a remnant of days long gone but it can still come back to haunt business owners.  This additional tax can be assessed against a closely held company if it receives excess investment income. However, with some careful tax planning, you may be able to avoid any dire tax consequences.  

Generally speaking when purchasing a business, the buyer is only going to want to acquire the assets of that business and not buy the actual business entity. Why not? Well, the entity could have unwanted characteristics or hidden liabilities.  For example, if the previous owner made a mistake on a tax return, that mistake could lead to thousands in unexpected tax liability, penalties and/or interest, which the new owner would not want to incur.

There are circumstances where an asset sale is not the prefered purchase method. Typically, those are situations where the business entity holds a license that is non-transferrable, such as a liquor license, or the entity has a non-transferable contract, such as a government that took a long time to bid and be awarded, but for most transactions, an asset sale is going to be the preferable form of purchase.

So, you’ve worked hard to build your business, protected your personal assets within the corporate veil of an Alabama LLC, and executed the “big three” estate planning documents (Will, Durable Power of Attorney, and Advanced Healthcare Directive) to plan for your death.  That’s great, those are some really good steps toward securing your legacy.

But what happens to that LLC when you die? A 2014 case involving an Alabama LLC, the case of L.B. Whitfield, III Family LLC v. Virginia Ann Whitfield, et al., is instructive, but may provide some unsettling news.

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