WASHINGTON DC., August, 2022 – As family businesses seek new generational leadership the question of what the best company structure is to pass down the reigns continues to be a “pass through” entity, such as a S Corporation, Limited Liability Company or Limited Partnership, according to a new poll on family business ownership status.
The new poll, conducted by Family Enterprise USA, found that 58% of family businesses operate as a Subchapter S Corporations and 12% operate as a Limited Liability Company (LLC) while only 21% operate as “regular” or C Corporation. The conclusion is that 79% of family businesses are structured as a “pass through” entity.
“One of the most critical times in a family business’ evolution is moving to the next stage of development or next generation and the structure can help or hinder that due to the economic impact of the taxes on that structure,” said Pat Soldano, president of Family Enterprise USA and its sister organization, the Policy and Taxation Group. Both groups advocate on behalf of family businesses in the U.S.
The significance of this data is that “pass through” entities, S Corporations, LLC’s, and Limited Partnerships pay income tax at ordinary income tax rates, currently 35% or more and C Corporations pay income tax at a 21% tax rate: significantly lower. This puts family businesses at an economic disadvantage to businesses who operate as a C Corporation. It is an unfairness that was created in the tax act of 2017, The Tax Cuts and Jobs Act.
Unfair Family Business Taxes
“Unfair taxes are the serious reason family businesses sometimes change their company structures, but many times it is not possible,” said Soldano. “Family businesses that are ‘pass throughs’ are paying a thirty five percent federal tax, while businesses under a C corporation are paying only twenty one percent,” she said. “It’s just outrageously unfair to the top private employer in the country.”
It gets worse, too, according to Soldano.
The current estate tax, or Death Tax as it has been named, often forces family businesses to sell their businesses outright due to the high taxes upon the death of the family owner, whereas C Corporations do not pay an estate tax.
“It’s critical that family businesses, where 79 percent are pass-through entities, make their voices heard in Congress,” said Soldano. “We can alter these unfair and tax disadvantages that are systematically killing our country’s greatest source of private employment, growth, and innovation. If we don’t, many of these family businesses will have to be sold.”
If you have a family business and a story to tell about your success and/or challenges go to www.familyenterpriseusa to submit them to us on the Contact page
About Family Enterprise USA
Family Enterprise USA promotes family business and job creation, growth, viability, and sustainability by advocating for family businesses, their lifetime of savings, and the issues they face running their businesses every day. The issues we fight for or against with Congress in Washington DC are high Income Tax Rates, possible elimination of Valuation Discounts, increase in Capital Gains Tax, enactment of a Wealth Tax, and the continued burden of the Estate Tax (death tax), and with the possible elimination of Step up in Basis. Family Enterprise USA represents and celebrates all sizes, and industries of family businesses and multi-generational employers. Family Enterprise USA is a 501.C3 organization
Contact:
Pat Soldano
pmsoldano@family-enterpriseusa.com
714-357-3140
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