Commission Income from the Sale of Licensed Products (annuities, life insurance, mutual funds, insurance etc...) Can't be Routed Through a Non-licensed Entity.

 

Owner Objective - Limit Liability Exposure

Due to our increasingly litigious society, modern businesses held by one owner are organized into small entities wherein a legal suit or other major liability exposure in one entity does not jeopardize the equity of the whole. 

 

That appears frequently the foundational principal upon which Limited Liability Companies ("LLCs") and electing S corporation, are formed. 

 

Conflict with Life and Securities Licensing Regimes

The securities and insurance industry's licensing regimes frequently grant those licenses to individuals who hire employees to help them manage their book of business.  However, confusion exists when in an attempt to isolate employment liabilities the licensee establishes a separate legal entity, such as an  LLC, which has no separate license on it own right upon which to shelter clients who contract with the licensee personally under their license, not in the name of the entity. 

 

That is, the LLC has no third party revenue sources, and if it were to develop any it would likely be in violation of State and or Federal insurance and securities laws. 

 

Taxation Impact of Revenue Earned Individual, but Expense Paid from a Separate Legal Entity

Consequently, the LLC does not, and cannot earn commission income. Rather, its revenues constitute no more than a very time consuming and poorly played shell game with the individual licensee (frequently without written agreements, the lack of which invite the IRS or worse, regulators, to interpret the transactions) with the following tax attributes:

 

 

Best to Liquidate Those Entities

Our recommendation would be to document the original reasons for the entity, current realities and then formally liquidate rather continue the above exposures. 

 

Corporate Liquidations Require Asset Be Distributed at Fair Market Value

Complications of using a Corporation (be it an electing S corporation or C corporation) include the fact that all assets owned by a corporate entity must be distributed at their fair market value (IRC Section 336) and from an income tax viewpoint, treated "as if" sold and tax paid on that non-cash transaction. 

 

That rule is a consequence of the 1986 repeal of the "general utilities doctrine."  Unfortunately, this is a trap if the entity has been in business for a long time and established, from advertising regulated products, goodwill and recognized trade name value, assets very difficult to value and subject to IRS disagreements upon audit.

 

If you have such a structure, if the Licensee owns trade name, rather then the entity, that fact may significantly limit the income tax cost of liquidation.

 

Incorporating Business Since the 1986 Repeal of General Utilities

Due to the as if fair market value liquidation taxation requirement, and as you might imagine, it is now rare for entities to be corporations as a consequence of the 1986 repeal of the general utilities doctrine.  Rather, tax planning experts such as DSB&Co almost exclusively use LLCs taxed as sole proprietorships or as partnerships, which is their default tax status. 

 

If you have a corporation formed after 1986, you may not have been appropriately advised.

In your CPA firm's experience, what is the most material overlooked deduction in the estate, gift and trust income tax area

If you have any questions, do not hesitate to contact the professionals at Dana S. Beane & Company, P.C.

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