Financial Planning Foul-Ups

(Continued from page 50) there is any material change in ownership of the company while the loan remains outstanding, then the bank has a right to call in any or all of the note." And, in some cases, the bank has a say in who actually can own the shares of the stock and or run the business.

Mrsrmr 2

Subthapter S disqualif ication

Many a successful business owner has yet to address the stock restriction clause as to the transfer of stock to another entity (a trust, a person, or another corporation) that is not a qualified S corporation shareholder. If this happens, it will terminate the S election and revert back to a C (regular) corporation status.

If the stock is passed to heirs in a trust that doesn't contain the strict language and requirements for "holding S corporation stock," this too can terminate the S election.

If there are family members who are not "working in the business" and draw a salary (actually defined as S distributions). this could be a devastating tax blow to the shareholders and be reclassified as a dividend. For example, since large stockholders of General Motors who do not actually work there are prohibited from drawing a salary, their compensation would be a dividend. I can't begin to tell you the number of family-owned C corporations I see where shareholders who work at another company receive a salary from the family enterprise because they are shareholders-and feel that it is their birthright!

Moto*= 3 Buy/sell agreemenl not annually reyiewed This mistake could prove fatal to the surviving shareholders. If there is not a mechanism to properly value the enterprise on a before-mentioned formula on a regular basis, then the deceased owner's family member could challenge the value of the business in court. You do not want to be a party to this type of action. Make sure that the values of the company are reviewed annually and signed off on by all interested parties.

M'srmr4

Flawed buy/sell agreementslifetime vs. death transfers

A recent Tax Court memo, 2004ll6 Estate of Blount, held that during an owner's lifetime a buy/sell agreement cannot offer stock for sale for more than the death price. In Blount, the Court found for the IRS and held that the stock price would be assessed at fair market value and additional tax and penalties would have to be paid.

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