Inherited Business: Entity Type Determination

If you're uncertain about the legal structure of your inherited business, determining the entity type is your first priority. The structure determines how basis step-up works and what tax elections are available.

Entity type is the first question a CPA will answer. Every downstream tax decision -- basis calculations, filing requirements, self-employment tax, available elections -- depends on knowing whether the business is a sole proprietorship, LLC, S corporation, C corporation, or partnership. A CPA can determine this from the decedent's prior tax returns, state filings, or IRS records.

Where to look. The decedent's most recent tax return is the fastest clue. Schedule C means sole proprietorship or single-member LLC. A K-1 from Form 1065 means partnership or multi-member LLC. A K-1 from Form 1120-S means S corporation. Form 1120 means C corporation. State Secretary of State records confirm whether an LLC or corporation was formally registered.

Time-sensitive elections may be waiting. Some elections (like Section 754 for partnerships or QSST/ESBT elections for S corp trusts) have filing deadlines measured from the date of death. Not knowing the entity type delays these elections.

The pitfall: Guessing the entity type and acting on that assumption can trigger irreversible tax consequences. A CPA should confirm entity classification before you sign anything, file any returns, or make operational decisions.