When an entrepreneur starts out on his/her long journey of building a legacy with his business; he/she almost immediately focuses on the legal status of his business. Thoughts include: ‘Should I become a limited liability company or an S-Corporation?’; ‘What if I take on partners?’; ‘How do I get more capital without giving up control?’
Revocable trusts are legal arrangements which can easily be terminated by the grantor. This is critical to understand about revocable trusts, if the grantor retains the right to make changes, in effect he has not given absolute permission for a formal entity to exist. In effect, he can revoke the rights or terms and conditions to the agreement.
Those small businesses using partnership or S-Corporation formats issue Form K-1 to the respective owners. When income is assigned to the owner and there is no corresponding cash related to that income, then this income is referred to as ‘Phantom Income’. In effect, it is assigned income for tax purposes without the corresponding cash to pay the tax liability.
Dividends and distributions refer to the payment of cash to investors. Why are there two separate terms? Well, the term is tied back to the type of entity that makes the payment. Simply stated, regular corporations, i.e. C-Corporations as identified in the Internal Revenue Code use the term ‘Dividends’ and S-Corporations (Small Business Corporations) use the term ‘Distributions’. In addition to S-Corporations, other closely held business use the term ‘Distributions’ to identify amounts disbursed to the respective owners or beneficiaries. These forms of entities include Partnerships, Limited Liability Corporations, Trusts and Estates.
Although it appears relatively simple at first, it is slightly more involved than this and this article addresses the proper definition and context use when using these two similar terms. In addition, there are more differences between the two terms than just the source of the payment. For a full and detailed understanding of the terms, continue reading.
When an individual passes away, his/her will or trust identifies a representative to administer his/her estate. This representative is referred to as the executor (male) or executrix (female) and is generally approved or assigned by the local circuit court. The Internal Revenue Service tasks this representative to file a final personal return and information returns until the estate is completely transferred to the heirs.
A trust is an agreement for one party to care for the assets of another party for the benefit of a third party. In essence, it is a business agreement. The person creating or the original owner of the assets is referred to as the Grantor. The party that will take care of the assets is known as the Trustee. The third party to receive the benefits is referred to as the Beneficiary.