Should I incorporate my business? (continued...)
Let's continue our conversation about incorporating a small business and important reasons to consider forming a corporation. Last time we touched on limited liability and today let's explore income tax savings and transferability.
Income Tax Savings. From an income tax perspective, a sole proprietor pays self-employment taxes on the net profit of a business. As the net profit from the business operations increases over time, the owner may be able to reduce the amount of self-employment taxes by incorporating as a "S" corporation and taking only a portion of the net profits as officer's salary, while treating the balance as shareholder distribution. S corporations are pass-through entities for income tax purposes and no tax is typically paid at the corporate level. At the end of the year, the shareholders receive a K-1 tax form showing their proportionate share of profits (or losses) which they will include on their individual 1040 tax returns each year.
Transferability. The third aspect mentioned above, ease of transferability of ownership, is especially important where a partnership business is incorporated, or where there are two or more shareholders operating the corporation. Frequently, the shareholders will enter into a buy-sell agreement which deals with the legal issues arising from the incapacity or death of a shareholder, or when one of more of the shareholders wishes to sell or transfer his or her interest in the corporate business.
An alternative to the corporation is the limited liability company. These types of entities are similar to corporation in that they offer limited liability and ease of transferability of membership interests, but they generally do not offer the same income tax savings to the owners as the corporate entity.
I hope that this helps for those of you considering incorporating. The foregoing is but a brief overview of a complex subject and the reader is cautioned to seek the advice of an experienced business attorney and their accountant before proceeding with the incorporating process.
Wednesday, January 23, 2013
Wednesday, January 16, 2013
Should I incorporate my new business?
January 16, 2013
Should I incorporate my new business? (Part One)
This is a question I am often asked my clients in my business law practice. My immediate response is just as often: "It depends".
In the aftermath of the Great Recession of 2008 many individuals have been laid off their jobs, or upon graduating from college cannot find a job. Many of then have decided to start their own small businesses in order to use their skills and earn a living. Typically, an individual will operate a new start-up business as a sole proprietorship. There are few legal requirements for doing business as a sole proprietorship beyond applying for a business license, filing a fictitious business name statement, and opening bank accounts for the business. In some instances, where the type of business is regulated by state law, a professional license is also required.
If the business and the resulting revenue continue to grow, there is a point in time at which the owner may consider incorporating. Here are three important reasons to form a corporation to operate a business. First, limited liability for the debts and liabilities arising from business operations. Second, income tax savings and benefits. Third, ease of transferability of ownership interests in the business.
First let's look at Limited Liability. Since a corporation, validly formed and operated, is an artificial person under the law, it is considered a separate entity and the assets and debts of the corporation are its own and not that of the shareholders, directors, or officers. For this reason many banks and lending institutions will require the individual shareholders to personally guaranty and loans or lines of credit available to the corporation. In other words, with a few exceptions, the corporation's creditors cannot sue the shareholders, directors, or officers personally absent a personal guaranty of the debt signed by them individually.
Keep posted for our next post later this week where we will focus on income tax savings and transferability. As always the foregoing is but a brief overview of a complex subject and the reader is cautioned to seek the advice of an experienced business attorney and their accountant before proceeding with the incorporation process.
Should I incorporate my new business? (Part One)
This is a question I am often asked my clients in my business law practice. My immediate response is just as often: "It depends".
In the aftermath of the Great Recession of 2008 many individuals have been laid off their jobs, or upon graduating from college cannot find a job. Many of then have decided to start their own small businesses in order to use their skills and earn a living. Typically, an individual will operate a new start-up business as a sole proprietorship. There are few legal requirements for doing business as a sole proprietorship beyond applying for a business license, filing a fictitious business name statement, and opening bank accounts for the business. In some instances, where the type of business is regulated by state law, a professional license is also required.
If the business and the resulting revenue continue to grow, there is a point in time at which the owner may consider incorporating. Here are three important reasons to form a corporation to operate a business. First, limited liability for the debts and liabilities arising from business operations. Second, income tax savings and benefits. Third, ease of transferability of ownership interests in the business.
First let's look at Limited Liability. Since a corporation, validly formed and operated, is an artificial person under the law, it is considered a separate entity and the assets and debts of the corporation are its own and not that of the shareholders, directors, or officers. For this reason many banks and lending institutions will require the individual shareholders to personally guaranty and loans or lines of credit available to the corporation. In other words, with a few exceptions, the corporation's creditors cannot sue the shareholders, directors, or officers personally absent a personal guaranty of the debt signed by them individually.
Keep posted for our next post later this week where we will focus on income tax savings and transferability. As always the foregoing is but a brief overview of a complex subject and the reader is cautioned to seek the advice of an experienced business attorney and their accountant before proceeding with the incorporation process.
Monday, December 20, 2010
MSNBC article on strategic default
While we are on the subject of strategic default, MSNBC released this article this morning:
Read the rest of the article by clicking here or cut and paste the following http://www.msnbc.msn.com/id/40704053/ns/business-real_estate/By Jane Hodges
msnbc.com contributor msnbc.com contributor
"More Americans than ever are showing a willingness to walk
away from their underwater homes,
according to a recent survey. Chris Kelly is a perfect example of someone who
never thought she would send the bank “jingle mail” — mailing the keys back. But
she did.
Sunday, December 19, 2010
When Strategic Default is not a good strategy
With the housing market on life support and thousands of homeowners "under water" on their homes (the loan balances exceed the value of their property), we hear that many borrowers are opting to quit making their mortgage payments, even though they may have the financial ability to keep current. The informed decision to intentionally default on the loan or loans under these circumstances is called a "strategic default".
Indeed, it is frustrating and downright depressing to have to keep making monthly payments to the bank on a $300,000 mortgage when the repo next door goes for $150,000 but while it is tempting to just walk away from a property that is under water, there can be serious legal consequences for the unwary borrower. Aside from the obvious hit to their credit score resulting from the failure to make payments, they need to consider the possibility of a deficiency judgment.
In California, there are anti-deficiency laws which protect most borrowers of single-family residences from personal liability for their home loan. The money loaned by the bank for the purchase of the residence is referred to as a "purchase money" obligation and in the event of default the only thing the bank can do is foreclose on its security. The bank cannot sue the borrower for a personal money judgment for the balance owed on the loan. When the property goes to trustee's sale, the note ceases to exist.
However, it is possible for the homeowner to lose the purchase money protection if the original loan is refinanced. Greater danger lurks when there are junior liens on the property. For example, many individuals have 2nd and 3rd, and even 4th deeds of trust on their property as a result of refinancing or additional borrowing for other purposes (to pay off credit cards, to purchase automobile, to pay for college tuition, vacation, etc.) with the residence used as collateral. These types of loans are generally not purchase-money and the borrower is personally liable for payment.
When the borrower opts for the strategic default method, it is possible that the holder of the 1st lien on the property may foreclose and when the property goes to sale the junior lienholders are "wiped out" (they lose their lienholder status). Consequently, the lenders no longer have any collateral to secure the loan and they can pursue the borrower in state court for a personal money judgment for the unpaid balance of the loan.
The final result of the strategic default in these cases is that the borrowers not only lose the home, but their credit is damaged and they wind up with debt collection actions and possibly one or more money judgments entered against them.
Indeed, it is frustrating and downright depressing to have to keep making monthly payments to the bank on a $300,000 mortgage when the repo next door goes for $150,000 but while it is tempting to just walk away from a property that is under water, there can be serious legal consequences for the unwary borrower. Aside from the obvious hit to their credit score resulting from the failure to make payments, they need to consider the possibility of a deficiency judgment.
In California, there are anti-deficiency laws which protect most borrowers of single-family residences from personal liability for their home loan. The money loaned by the bank for the purchase of the residence is referred to as a "purchase money" obligation and in the event of default the only thing the bank can do is foreclose on its security. The bank cannot sue the borrower for a personal money judgment for the balance owed on the loan. When the property goes to trustee's sale, the note ceases to exist.
However, it is possible for the homeowner to lose the purchase money protection if the original loan is refinanced. Greater danger lurks when there are junior liens on the property. For example, many individuals have 2nd and 3rd, and even 4th deeds of trust on their property as a result of refinancing or additional borrowing for other purposes (to pay off credit cards, to purchase automobile, to pay for college tuition, vacation, etc.) with the residence used as collateral. These types of loans are generally not purchase-money and the borrower is personally liable for payment.
When the borrower opts for the strategic default method, it is possible that the holder of the 1st lien on the property may foreclose and when the property goes to sale the junior lienholders are "wiped out" (they lose their lienholder status). Consequently, the lenders no longer have any collateral to secure the loan and they can pursue the borrower in state court for a personal money judgment for the unpaid balance of the loan.
The final result of the strategic default in these cases is that the borrowers not only lose the home, but their credit is damaged and they wind up with debt collection actions and possibly one or more money judgments entered against them.
It pays to be careful and know your legal rights and obligations before making a major financial decision.
Monday, March 29, 2010
In the beginning...
In the beginning there were words. Those words were compiled to create phrases and from those phrases was created legal verbiage. In this blog (or "blawg" as legal blogs are often known) I will attempt to translate this verbiage through occasional updates pertaining to the practice of business and estate law in California.
This blog, while discussing legal information, does not constitute legal advice. For client inquiries contact me directly by e-mailing Rick_Von@msn.com or by phone at (760) 747-8841.
This blog, while discussing legal information, does not constitute legal advice. For client inquiries contact me directly by e-mailing Rick_Von@msn.com or by phone at (760) 747-8841.
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