Our Denver small business attorneys assist small to medium sized partnerships and corporations from formation and entity structure, to the sale of the business or business interests and all transactions while the entity is operating. Our business attorneys understand the nuances of small businesses and thus help the business owners regarding specific tax and business law issues and transactions as well providing insight on practical considerations. This allows the small business owner to make more educated business decisions.

Allocation of Purchase Price Paid for a Business

How is the purchase price or monies paid for a business allocated?  When a business owner sells their business for a lump sum amount, the sale is considered a sale of each individual business asset as opposed to one single asset.  Of course, this would not necessarily apply if the exchange or transfer was considered a nontaxable exchange.  The article below has been prepared by a Denver tax attorney at The McGuire Law Firm to provide additional information regarding the allocation of consideration that is paid for a business.  Please remember to discuss your specific facts and circumstances with your tax attorney and/or business attorney.  You can contact The McGuire Law Firm to speak with tax attorney in Denver.

As stated above, the sale of a business for a lump sum will be treated as the sale of each individual asset.  The residual method must be used by both the buyer and the seller in allocating the consideration paid.  The residual method will determine the gain or loss from the transfer of each asset, as well as how much of the consideration paid is allocated to goodwill and other intangible property.  The buyer’s basis in the business assets purchased will also be determined through this method, and the buyer’s consideration is the cost of the assets that are acquired through the transaction.  The seller’s consideration will be the amount realized from the sale of the assets.  The amount realized would be the cash (money) received and the fair market value of any property received.

Thus, what is the residual method that will be used to determine the above issues?  The residual method is the method used whenever a group of assets is transferred whereby the group of assets constitutes a trade or business, and the buyer’s basis is determined solely by the amount that was paid for the assets.  The method applies to both direct and indirect asset transfers such as the sale of a business, or the sale of a partnership interest where the buyer’s basis of such interest is adjusted for amounts paid under Internal Revenue Code Section 743(b).  743(b) would apply if the partnership has made a Section 754 election.  The residual method provides that consideration must first reduce (or be applied to) Class 1 assets.  Thereafter, consideration is applied to Class II though VII assets.  These classes of assets have been discussed in previous articles.  Class I is cash and general deposit accounts and Class VII is goodwill and going concern.  A group of assets will constitute a trade or business if going concern or goodwill could attach to them or, the use of the applicable assets would constitute an active trade or business under Internal Revenue Code Section 355.  Thus, once a group of assets is determined to constitute a trade or business, the residual method can be viewed as a hierarchy of the application of the consideration paid for the purchase of a business into separate classes, such classes being Class I through Class VII.

If you have questions regarding how the sale of your business or the purchase of a business will be taxed, speak with a Denver tax attorney at The McGuire Law Firm.  The purchase or sale of a business involves many tax related issues that should be discussed with a tax attorney or a business attorney.  Schedule a free consultation with a tax attorney in Denver by calling 720-833-7705.

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Member Managed LLC

A limited liability company (LLC) can be managed by a manger or managers, or the LLC can be managed by the members of the LLC.  There are advantages to both depending upon the circumstances of the business, the knowledge of the members, the involvement of the members and other issues.  For example, the members of a certain LLC may all be passive investors of the LLC and have little knowledge regarding the operations of the LLC.  Thus, it may be best to hire a professional manager or individual that has better know how regarding the subject matter or area in which the LLC is operating.  Furthermore, the members of an LLC may have no interest and not want to manage the LLC and thus hiring a manager or managers maybe more prudent.  On the flip side, the LLC may have a small number of members and the members are well versed and experienced in terms of operating a business and the area in which the LLC is operating.  Under such circumstances, it is likely the members themselves would want to manage the LLC.

In Colorado, you state whether the LLC is member managed or manager managed within the Articles of Organization.  The operating agreement of the LLC will state and control the powers of the manager or managers, or the members as they manage the LLC.  It is recommended that the managers responsibilities and powers be well defined in the LLC operating agreement.

The video below has been prepared by a Denver business attorney to provide more information regarding the management structure and options of an LLC.  Please remember this article and video are for informational purposes.  It is recommended that you speak with your business attorney regarding the management structure of your business.

Contact The McGuire Law Firm to discuss your business questions and issues with a Denver business attorney.  A free consultation is offered to all potential clients!

 

 

Cash for Assets Business Acquisition

In previous articles a business attorney from The McGuire Law Firm has discussed certain acquisitions between corporations.  The article below will discuss an acquisition known as a cash for assets acquisition.

The first step of a cash for assets acquisition, Corporation 1 would pay Corporation 2 cash consideration of the assets of Corporation 2.  Corporation 1 could decide to accept the liabilities of Corporation 2, and such acceptance would lower the purchase price.  Please note, Corporation 1 does not have to accept the liabilities of Corporation 2 in this type of asset acquisition though. No change would be necessary in the corporation documents of Corporation 1 or Corporation 2 and no change would need to occur in the outstanding shares of either corporation as well.  After the purchase, and as may be commonly seen, Corporation 2 could dissolve after the sale of the corporate assets.  If Corporation 2 did dissolve, the corporate charter would be cancelled and the shares extinguished.  After Corporation 2 satisfied all remaining liabilities, the remaining cash would be distributed to the shareholders of Corporation 2 in a liquidating distribution.  The dissolution and liquidation of Corporation 2 would not impact the shareholders of Corporation 1.

If Corporation 2 did not dissolve and distribute the cash to the corporate shareholders, Corporation 2 would reinvest the cash in operating assets or for corporate operations.  If Corporation 2 reinvested this cash in passive assets such as stocks or bonds, it is important to know that the Internal Revenue Code could deem Corporation 2 a Personal Holding Company and such designation may not have the most favorable tax treatment.  Thus, from a practical point of view, a corporation in Corporation 2’s shoes, is likely to reinvest in business assets to produce income, or dissolve and distribute the monies to the shareholders.

The cash for assets acquisition differs from a stock swap merger in a couple of ways.  First, the shareholders of Corporation 1 shareholders do not vote in the asset acquisition.  Second, the post transaction of the Corporation 2 shareholders is different as in the cash acquisition the shareholders will be cashed out as opposed to holding shares in the survivor corporation.  Third, Corporation 2’s pre-transaction liabilities may remain with Corporation 2 depending upon the terms of the transaction.  Additionally, a stock swap merger, also known as an A Reorganization is typically a tax free transaction, whereas the cash for assets acquisition is likely to be a taxable transaction.

You can speak with a Denver business attorney at The McGuire Law Firm if you have questions regarding a business transaction and/or the tax implications of a business transaction.

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Series of Distributions to a Withdrawing Partner

When a partner in a partnership is having their interest terminated, often such termination may be through a series of distributions.  The series of distributions may be needed due to the cash flow of the buyer or purchaser. Thus, the question arises, are these liquidating distributions?  The article below has been drafted by a Denver tax attorney to provide information regarding a series of distributions to a partner in a partnership in liquidation of the partner’s interest.  Discuss your partnership tax matters and questions with a tax attorney in Denver by contacting The McGuire Law Firm.

When a withdrawing partner’s interest is terminated through multiple, or a series of distributions to the partner, each distribution can be considered a liquidating distribution as opposed to a current distribution.  This is so even if the partner is a tax partner until the final distribution is made (see IRC Section 761) and recognizes gain only after total, actual or the constructive money distributions would exceed the outside basis of the partner’s partnership basis.  Therefore, this is not necessarily installment sale treatment, but rather open transaction treatment.  It is also important to note that a withdrawing partner can only recognize a loss once the final liquidating distribution is received.

The partnership’s obligation to make the distribution is not treated as a cash equivalent for a cash method taxpayer nor is it treated as an obligation for an accrual method taxpayer.  Under IRC Section 736, the obligation to make these deferred payments is not a debt obligation.  Thus, the liquidating distributions can be made by the partnership to the partner as a debt obligation that liquidates the interest immediately and thus the withdrawing partner is considered more as a creditor than as a partner of the partnership.

For example, John is withdrawing from J Cubed, LLC and the partnership agreement satisfies the special allocation regulations.  John is entitled to receive $100k upon his withdrawal.  Half is payable upon withdrawal and the other half in the year after the withdrawal.  John’s outside partnership basis is $75,000.  Thus, assuming there is no 751 Exchange, John will not recognize gain on the initial distribution of $50,000 because of the $75,000 in outside basis and gain recognition rules.  All of the $25,000 gain John will recognize will be recognized upon the second distribution.  J Cubed’s obligation to make the second $50,000 distribution is not a debt obligation.  The gain of $25,000 may be capital gain, but one should always considerable the collapsible partnership rule.  Assuming John had an outside basis of $150,000 and received the same $100,000 total in distributions, the loss could not be recognized until the second payment was made.

If you have tax questions relating to the sale of a business or business interest, discuss these questions and issues with a Denver tax attorney at The McGuire Law Firm.  You can schedule a free consultation with a tax attorney in Denver who can assist you with your matters.

Denver Business Attorney Video on Contributing Property to a Partnership

When a partnership is formed the partners will generally contribute property to the partnership in the form of cash and/or property.  These contributions of property impact the partner’s basis and capital account in the partnership and thus may impact tax matters in the future.  A contribution of property will generally increase a partner’s capital account and a distribution of property from the partnership to the partner will generally decrease a partner’s capital account in the partnership.

The video below has been prepared by a business attorney at The McGuire Law Firm to provide general information regarding the contribution of property to a partnership.  You should speak directly with your business attorney or tax attorney regarding your partnership matters and the contribution of property.

Contact The McGuire Law Firm to speak with a business attorney or tax attorney in Denver or Golden Colorado.

Controlled Partnership Transactions

Previous articles posted from The McGuire Law Firm have discussed controlled entities and certain related party issues.  The article below has been prepared by a tax attorney at The McGuire Law Firm to discuss controlled partnership transactions.

A controlled partnership is a partnership of which 50% (fifty percent) or more of the capital interest or profits interest is directly or indirectly owned by or for such person.  A gain that is recognized in a controlled partnership transaction may be ordinary income.  The gain can be ordinary if the gain is the result of a sale or exchange of property that in the hands of the party receiving the property is a noncapital asset such as accounts receivable, inventory or depreciable or real property used in a trade or business.  A controlled partnership transaction is a transaction directly or indirectly between either of the following pairs of entities:

–          A partnership and a person who directly or indirectly owns more than 50% of the capital interest or profits interest in the partnership

–          Two partnerships, if the same person directly or indirectly own more than 50% of the capital interests or profits interest in both partnership

How is ownership determined?  Under most situations, stock or a partnership interest directly or indirectly owned by or for a corporation, partnership, estate or trust is considered owned proportionately by or for its shareholders, partners, or beneficiaries.  However, one should note that for a partnership interest that is owned by or for a C corporation, the above rule should only apply to those shareholders who directly or indirectly own 5% or more in value of the stock of the corporation.

An individual will be considered to own the stock or partnership interest directly or indirectly owned by or for his or her family.  So what constitutes family?  Family would include only sisters, brothers, half-sisters, half-brothers, a spouse, ancestors and lineal descendants.  In applying these rules, stock or a partnership interests that are constructively owned by a person via ownership in an entity is treated as actually owned by that person.  However, stock or a partnership interest that is constructively owned by an individual through a family member is not treated as owned by the individual for reapplying this rule to make another family member the constructive owner of tat stock or partnership interest.  No “double-dipping” so to speak in terms of this type of constructive ownership.

You can discuss your tax and business transaction matters with a tax attorney or business attorney at The McGuire Law Firm.  The McGuire Law Firm offers a free consultation to all potential clients.  Contact a tax attorney in Denver by contacting The McGuire Law Firm.

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Denver Small Business Attorney John McGuire

As a business attorney John McGuire works with small and medium sized businesses regarding their legal needs.  The article and video below are to help provide information regarding the services John provides to small businesses.

John advises and provides services for small businesses regarding the following business issues:

–          Choice of entity

–          Overall entity and business structure

–          The business & individual tax implications given a choice of entity

–          The tax implications & impacts from specific business transactions

–          Business contracts- drafting & negotiations

–          The sale or purchase of a business- stock sales and assets sales

–          Business tax planning

The above are a few examples of the services Mr. McGuire can provide a small business.  Mr. McGuire can assist a business at every level from formation of the business, to legal needs as the business operates and the eventual sale or disposition of the business.  Please view the video below to hear more about these services and meet Mr. McGuire.

Contact The McGuire Law Firm to speak with a Denver small business attorney.  The McGuire Law Firm provides a free consultation to all potential clients and would welcome the opportunity to meet you and learn more about your business needs.

Asset Sale Discussed by Denver Business Attorney

Generally speaking when one business buys or acquires another business the transaction can be either an asset sale or a stock sale.  There are different tax implications, liability matters and other issues depending upon how the transaction is set up.  The video below has been prepared by a Denver business attorney at The McGuire Law Firm to discuss general matters relating to an asset sale.  Please remember that the information provided in the video below is for informational purposes.  You should always contact your business attorney and/or tax attorney to discuss the sale or purchase of any business assets or the stock of a corporation.

If you feel the need to speak with a business attorney in Denver, please contact The McGuire Law Firm to schedule a consultation.

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S Corporation Schedule K-1 Discussed by Denver Tax Attorney

A K-1 is an informational return, and a shareholder in an S Corporation would receive a K-1 stating that shareholder’s share of gain, loss, credits etc. from the S Corporation.  Because an S corporation is a pass through entity, the S corporation does not pay income tax, but rather the shareholders claim the items on their tax returns.  Typically, the shareholders of an S corporation are individuals and thus the items would be claimed on 1040 individual income tax returns.

The K-1 states the shareholders name, address and identification number, which is usually a social security number.  Of course, the K-1 will also stated the information for the applicable S Corporation.  Further, the shareholder’s percentage of ownership in the S corporation is stated.  The K-1 is issued to the Internal Revenue Service and the shareholder.  Thus, if the information stated by the shareholder does not match that received from the IRS, the shareholder may receive a notice from the IRS.  Further, if the shareholder does not file a return, the IRS has the information from the K-1 which can be used to prepare tax return for the shareholder if not voluntarily prepared.

A tax attorney from The McGuire Law Firm has also prepared the video below for additional information regarding a K-1 from an S corporation.  You can speak with a Denver tax attorney by contacting The McGuire Law Firm, and discuss your tax questions and matters.

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What is a Sole Proprietorship?

What is a sole proprietorship?  By definition a sole proprietorship is a business with a single owner.  Thus, there are not multiple partners, shareholders or individuals working together for a profit such as with a partnership or corporation.  I am surprised at how often I see individuals operating as sole proprietorship and I have seen individuals making $200,000 to $500,000 per years as a sole proprietorship!  It is not that the type of entity can help you make more money but rather, I always assumed with making such money, the individual would want to more structure and liability protection.  The article below has been drafted by a business attorney to provide some information regarding a sole proprietorship.

Within a sole proprietorship, the individual is the business and the business is the individual, there is no separate entity formed with the secretary of state.  In its simplest sense, the individual just starts operating the business.  Although this make a sole proprietorship simple and may be considered an advantage, there are disadvantages.  The proprietor is personally responsible for all debts and liabilities of the business.  Thus, the proprietor could be exposed to significant amounts of liability, especially depending upon the industry the proprietor is in.

From a tax perspective, a sole proprietorship does not file its own tax return, but rather the proprietor will prepare and file a Schedule C with their 1040 Individual Income Tax Return.  The proprietor will pay self employment tax on the net income of the business, which is calculated on a Schedule SE.  It is also interesting to note that a single member limited liability company (LLC) is considered a disregarded entity for tax purposes and thus the single member of an LLC will file a Schedule C with their 1040 tax return as opposed to a 1065 partnership income tax return.  The single member LLC may still receive limited liability in terms of liability protection, but in the eyes of the IRS, the single member is treated as a sole proprietorship.

In short, the defining characteristics of a sole proprietorship are that there is a single owner, no forms are filed or organized with the secretary of state and the proprietor is liable of the debts and liabilities of the proprietorship.

If you are considering forming a business or are looking at the entity structure of your current business, speak with a Denver business attorney and tax attorney at The McGuire Law Firm.  An attorney can assist your entity choices and discuss the tax implications of choosing a certain entity over another.  Further, a business attorney can assist you with the drafting of contracts, contract negotiations, the sale of your business or business assets and other business matters.

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