Wednesday, March 7, 2018

What Factors Should You Consider When Starting a Business?

When you decide to start a business venture, there are a myriad of things to consider.  You have possibly already chosen the purpose of your venture and what it is you are going to make, do, or sell.  You have probably also played around with what to name your business.  Now what?  Where do you go from here?

We regularly assist small business owners, especially start-up businesses, walking them through the steps that need to be taken in order to make the business official and legal.  There are many ways a business can be organized and there are non-tax factors, tax factors, and state statutory requirements that need to be taken into consideration when embarking on this exciting journey of starting a business.

This article focuses on a few of the non-tax factors that need to be considered.  A follow-up article will discuss the tax factors of organizing your business.  Much of the information in this article relates to the laws in a majority of jurisdictions along with examples of specific instances where North Carolina law is different from the majority of jurisdictions.  The statutory requirements of starting a business are state specific, therefore it is important to seek the assistance of a professional who knows the law in your jurisdiction.  There are also state and local licensing as well as registration requirements that will need to be met depending on the jurisdiction your business will be located in.

In the tables below the entities are listed from the broadest/most flexible to the most restrictive.

Limit Liability for Business Entities

Limited liability is probably the most sought after attribute of business owners forming a new business venture.  New business owners wish to protect their personal assets from the claims of business creditors.  This can usually be achieved by organizing the venture under a state law that limits the owners' liability to the amount of capital the owner has invested in the entity.  Be very careful when capitalizing the business and applying for loans.  Some lenders may require that the owner(s) of the business provide a personal guarantee for the business obligations, thereby making the owner liable to those creditors of the business and defeating the purpose of the limitation of liability.

Business Entity Management and Control Comparison Chart
Business Entity Capital Structure
Transferability of Business Interests chart
Duration of the Business Entity chart

The business lawyers McGrath & Spielberger, PLLC assists clients with all sorts of tax, business, and estate planning matters in North Carolina.  Click here to contact us about your tax, business, or estate planning matter today.

Friday, February 16, 2018

Arbitration: How Do You Choose The Arbitrator?

Attorney Jason McGrath explains some things to consider when choosing the arbitrator during a lawsuit in this short video.

Here are some of the key points contained in the video:

  • If using a panel of 3 arbitrators: each party picks an arbitrator and then those two arbitrators pick the third one. 
  • If using only 1 arbitrator: one side presents a list of possible arbitrators to the other side and the other side picks from the list. 
  • You go back and forth and negotiate between the parties until a decision is made. 
  • You may wish to avoid attempting private conversations with potential arbitrators in order to avoid the appearance of impropriety. 
  • Consider all the information available to you to make an informed decision about your arbitrator. 
  • Arbitrators may also be appointed by the court.

If you need legal services in North Carolina, South Carolina, Georgia, Florida, Ohio, or Tennessee we invite you to fill out our confidential client form for possible legal assistance.


Wednesday, January 10, 2018

S-Corp Tax Election for LLC

S-Corp Tax Election: Is it Right for Your LLC?

As an attorney who happens to have an MBA and some specific tax law knowledge, and one who advises businesses on both day to day issues and tax matters, I know that if you’ve chosen (or will choose) an LLC as your business structure, it’s likely due to some combination of the liability protection an LLC offers, the operations and internal organization flexibility it allows, and the tax advantages which can accompany it. One of those tax advantages of an LLC can be the election to be taxed as an “S-corp.”

business financial decision, finances, taxes, tax election

Keep in mind that, as we’ve previously discussed, one does not really “form an S-corp.” – this a tax classification, not a type of business organization. Once a corporation is formed, the shareholders can unanimously elect to “become” an S-corporation by filing Form 2253 with the IRS. The resulting S-corp. is a corporation that’s status is governed by Subchapter S of the Internal Revenue Code. If no election is made, then the corporation defaults to a “C-corporation” for tax purposes and is governed by Subchapter C of the Internal Revenue Code.

The traditional C-corporation’s net income is subject to a double tax at the entity level and individual level, while partnerships, LLC’s, sole proprietorships and S-corporations enjoy a pass-through status for income earned by the business. However, partnerships and sole proprietorships typically do not provide the limited liability protection desired by most small business owners. Based on these combined factors, the LLC with an S-corp. tax election is often a wise choice for business owners.

The IRS automatically treats any LLC with two or more members as a partnership and any sole member LLC as an entity disregarded as separate from its owner for federal income tax purposes. Either default treatment will provide pass through benefits to the owners of the LLC, while providing the limited liability protection. However, an LLC is allowed to make an election to be treated as an S-corporation for federal income tax purposes.

Why would an LLC want to choose to be taxed as an S-corp. rather than a partnership? There are numerous reasons for an LLC to choose to be taxed as an S-corp., including being able to pay wages and salaries to owners (which are taxed similar to wages paid to non-owner employees) but also allowing owners to be paid distributions / profits and the LLC not being federally taxed on those monies. Most experts state that the election to be taxed as an S-corp. allows the avoidance of “double taxation” as to the distributions / profit distributions. While the greatest tax benefits are typically by being an S-corp. which pays a higher proportion of monies to owners as distributions, owners who do work for the company are supposed to be paid a “reasonable salary” so that at least some payroll taxes are being paid for that individual and his/her work.

In addition to the impact that a parent – subsidiary LLC relationship can have on the possibility of selecting S-corp. tax status (see further down), an S-corp. election does allow less flexibility as far as distributions paid to owners. Typically, distributions paid to an owner must be proportional with that person’s ownership share; in other words, if Sally owns 60% of the LLC and John owns 40%, Sally should be receiving 60% of the distributions (but their salaries need not match up that same way).

If you are an existing LLC which is considering changing its tax classification, please keep in mind that, according to the IRS, an entity usually can only make such a change once every five (5) years. Be aware that some states do not recognize the S-corp. status / election and business income could be subject to double taxation at the state level.

If an LLC elects to be treated as an S-corp. for tax purposes, the LLC must comply with the same rigid ownership requirements applicable to qualifying for S-corporation tax status. This becomes an issue for the parent-subsidiary LLC relationship, as a subsidiary LLC that is wholly owned by the parent LLC cannot make the S-corp. election. One must be careful to avoid committing this error in electing tax treatment for any subsidiary LLC’s.

This is merely a starting point for a discussion of these issues, and the devil is certainly in the details as far as both the law and taxes. If you need advice regarding a tax situation, a distressed mortgage loan, or something similar, please don’t hesitate to request a consultation with a lawyer. The tax consequences of forming a business and electing tax treatment can be complicated and it is always best to contact a tax professional to address your specific situation.