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Buy Sell Agreements Discussed by Denver Business Attorney

Many individuals who own closely held business interests, such as an interest within a limited liability company or closely held corporation will enter into a buy sell agreement.  These individuals (and perhaps their estate) may accomplish a number of planning objectives and goals with a buy sell agreement, and potentially optimize income, gift and estate tax outcomes and implications depending upon the overall situation.

When an individual owns a closely held business, which can be considered an interest in a business where no readily available public market exists, they may have a number of problems and related concerns regarding the closely held entity.  The individuals within the business have likely invested significant capital, and their family’s economic security and growth may depend upon the success of this business.  Moreover, if an owner of the business left due to disability, death, retirement or otherwise, the remaining owners may not want to work with a different or “new” individual, or with a member of the departed owner’s family.  Therefore, a goal and objective of a buy sell agreement is wealth preservation (and liquidity of the ownership interest under certain circumstances)  and the remaining business owners control, continuity and overall maintenance of the  business without the need to bring in “outside” third parties who may not be wanted.  There are multiple issues to discuss regarding a buy sell agreement such as the funding and pricing of the agreement and of course the overall income, gift and estate tax consequences from the agreement, which cannot be discussed all within one agreement.  Thus, the remainder of this article will outline the general types of buy sell agreements, which are discussed below.

Generally, when an owner departs from a business there are two common purchasers of the business interest.  The remaining owners may purchase the interest through a cross purchase agreement and the business entity may purchase the interest through a redemption agreement.  These cross purchase agreement and redemption agreement may be able to be combined into one hybrid buy sell agreement.  You may also have the possibility to have an agreement whereby the business interest is sold to an individual or business that previously, was not interested in the venture, or even to employee via an employee stock ownership plan.  The common types or forms of a buy sell agreement may be called or referred to as: cross purchase agreements, sale to a successor, redemption agreements, a hybrid buy-sell agreement (this would be a combination between a cross purchase and redemption agreement) and sale to ESOP (employee stock option plan).  These types of agreements will be discussed in more detail in later articles.

If you think a buy sell agreement could benefit you, contact The McGuire Law Firm to speak with a Denver business attorney.  A Denver business attorney can assist you with your options and the drafting of necessary contracts and agreements.

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What is a Letter of Intent?

What is a letter of intent?  This is a common question a client may ask their business attorney.  A letter of intent may be used in a handful of circumstances and can be useful tool when parties are attempting to spell out the major terms and conditions of an agreement prior to moving forward with further drafting and negotiations.  By ensuring the parties are in agreement with a letter of intent, significant time and money can often be saved.  The video below has been prepared by a Denver business attorney at The McGuire Law to provide information regarding a letter of intent when parties are discussing the purchase and sale of a a business or business assets.  It is always recommend you discuss your specific circumstances with your business attorney and/or business advisors.  You can contact The McGuire Law Firm to speak with a business attorney in Denver, Colorado.  The McGuire Law Firm has offices in Denver, Colorado and Golden, Colorado for your convenience.

Denver Lodging Tax

The City and County of Denver requires that hotels, motels, inns and other establishments collect a lodging tax from patrons and remit such lodging tax to the City and County of Denver.  A taxpayer required to collect and remit the lodging tax may do so by filing a monthly tax return (or quarterly tax return) with the City and County of Denver (Department of Finance)  The video below has been prepared by a Denver tax attorney to provide additional information regarding this lodging tax.  If you have any questions regarding your business, or tax requirements, you can speak with a tax attorney by contacting The McGuire Law Firm.

What is a Non Disclosure Agreement?

A Non Disclosure Agreement can be used in many circumstances.  The video below has been prepared by a business attorney at The McGuire Law Firm to discuss the use of a Non Disclosure Agreement in the context of a potential purchase or sale of a business.  Generally, it is recommended that you enter into a non disclosure agreement prior to discussing or disclosing any documents or information that would relate to a potential transaction.

The non disclosure agreement can protect you against the disclosure of confidential information that is disclosed to third parties as you move forward with a business purchase or sale.  For example, if you were looking to sell your business, you may not want your competitors or certain other third parties to have knowledge that you are contemplating such a sale.  Thus, the non disclosure agreement helps protect you from this type of information being disclosed.

Please feel free to contact The McGuire Law Firm to speak with a Denver business attorney regarding your business needs.  From the formation of your business, to the drafting and negotiating of contracts and the sale of your business, a Denver business attorney at The McGuire Law Firm can assist you.

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How is the Sale of a Business Taxed?

How is the sale of a business taxed?  How is the sale or transfer of my business (stock or partnership interest) taxed?  How is the sale of a business asset or group of business assets taxed?  These are common questions that a business owner or the holder of a business ownership interest such as stock or a partnership interest may ask.  The article below has been drafted to provide general information regarding the above questions or issues and is not specific legal advice for your specific issues and circumstances.  If you are considering selling your business or a business interest, you should consult directly with your tax attorney, business attorney and/or your other tax professional and related advisors.

Typically, a business will have many assets and thus the sale of the business is not the sale of only one single asset.  Generally, the sale of multiple assets of a business is treated as the sale of each individual asset to determine the gain or loss.  Thus when sold, the business assets need to be classified as capital assets, depreciable assets used in business, real property used in the business or inventory or stock in trade that is held so that the items can be sold to customers.  Again, the gain or loss on each item is calculated separately.  The sale of capital assets will result in capital gain or loss.  The sale of depreciable assets may result in ordinary income and the sale of inventory may result in ordinary income as well.

How will my partnership interest be taxed?  A partnership interest is a capital interest and will likely be treated as a capital gain or loss, but you recognize ordinary income or loss for inventory and unrealized receivables.

How will my corporate interest or corporate stock sale be taxed?  Your corporate interest is measured by your stock certificates or number of corporate shares.  Corporate stock is generally considered a capital assets and thus capital gain or loss is typically recognize, but exceptions due apply depending upon the overall circumstances of the shareholder and the corporation.

What is the tax treatment upon the liquidation of my corporation?  Corporate liquidations are generally treated as the sale or exchange of property and thus capital.  Generally, gain or loss will be recognized by a corporation on the liquidating sale of corporate assets.  Furthermore, typically gain or loss will be recognized on the liquidating distribution of corporate assets as if the corporation had sold the asset to the distibutee for fair market value.

If you have questions related to the tax treatment of the sale of your business or business interest, you may speak with a Denver tax attorney or business attorney by contacting The McGuire Law Firm.  The McGuire Law Firm provides you with a free consultation to discuss your matters with a tax attorney and business attorney.  You can call 720-833-7705 to schedule your consultation.

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Liability Relief and Liquidating Distributions From a Partnership

In previous articles liability relief from a partnership has been discussed.  Generally, liability relief from a partnership is deemed a distribution to the partner who has been relieved of the liability.  But, what happens when a partner is relieved of liability at the liquidation of the partnership?  Can liability relief be deemed a liquidating distribution to a partner in a partnership?  The article below has been prepared by a tax attorney in Denver, Colorado from The McGuire Law Firm to provide additional information regarding this issue.  Please remember to consult your tax attorney or business attorney directly regarding any related issues.

In regards to the question asked above, the answer is yes.  Just as with normal partnership distributions, liquidating distributions include not only money, but any relief from partnership liabilities.  Under Internal Revenue Code Section 752, a deemed distribution of cash or money is attributable to recourse liability relief when the deemed distributee (partner being relieved of liability) would no longer bear the economic risk of loss for the recourse liability of the partnership as a tax partner.  Often the question arises, when is a withdrawing partner relieved of a liability?  The general rule may be that a partner has immediate liability relief for any of the partnership liabilities that the continuing partnership maintains.  Under Private Letter Ruling 9622014, a selling partner will include guaranteed partnership liability in their amount realized when the purchasing partner indemnified the partners, even though the lender actually refused to release the withdrawing partner from the liability.  Thus, there was a deemed distribution even though technically the withdrawing partner would have still been liable to the bank under the terms of the bank loan.

What happens when the partner or partners receive a series of liquidating distributions?  When a partnership liquidates and the distributions are made through a series of liquidating distributions, recourse and non-recourse liability relief may not occur until the final distribution is received.  The reasoning behind this matter is that a withdrawing partner remains a tax partner of the partnership until the final distribution is received from the partnership.

If you are considering withdrawing from a partnership or liquidating a partnership, it is important to under the tax implications of the distributions from the partnership you will receive and how debt relief can be treated.  You can speak with a Denver tax attorney by contacting The McGuire Law Firm.  The McGuire Law Firm provides a free consultation with a Denver Tax Attorney to all potential clients.

Contact The McGuire Law Firm to schedule your free consultation with a Denver Tax Attorney!

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Unemployment Employer Audits in Denver, Colorado

Audits are performed by the Division of Unemployment Insurance within the Colorado Department of Labor and Employment as federally required. The requirement has been established in hopes of insuring compliance by employers as well as to provide guidance, information and help to employers.  How are businesses audited by the Division of Unemployment Insurance in Colorado?  This is a common question asked by business owners in Colorado, and the answer is that most of these audits are at random.  The United States Department of Labor requires that all states audit one percent (1%) of all employing businesses each year.  In Colorado, the “pool” to choose from is all employers that are registered or performing services within Colorado.

 

During the audit, the auditor will work to verify the following:

–          The proper classification of all workers (independent contractor versus employee)

–          The accuracy of wages being reported for workers

–          The appropriate filing of reports and information

 

The examination includes records such as tax returns, income statements, general ledgers, bank statement and other documents.  Authority is given through the Colorado Employment Security Act, in sections 8-72-107 through 8-72-110.

Often issues come about regarding the classification of workers. Many times an individual will be treated as an independent contractor when in fact they should be paid and treated as an employee.  The definition of an employee or employment is broad in Colorado, and does not necessarily fall under the common law relationship that may be used by the Internal Revenue Service.  In Colorado, there are two main concepts used to determine the status of a workers: 1) Is the individual free from control and direction in regards to the performance of services, when considering the contract for the performance of the services and in fact when the true circumstances are reviewed and, 2) Is the individual customarily engaged in an independent trade, occupation, profession or business related to the services the individual is performing.

An auditor will review all of the facts and circumstances during an audit such as any agreements in place, the day to day operations of the business, use of tools, how is payment made for services, advertising and the typical everyday operations and interactions within the business and the related parties.  An auditor can determine that individuals are employees as opposed to independent contracts and thus look to reclassify the status or classification of a worker.

You can contact The McGuire Law Firm to speak with a tax attorney or business attorney in Denver, Colorado regarding your business and tax matters.  The McGuire Law Firm allows a free consultation with a tax attorney in Denver or Golden Colorado.

 

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Non Deductible Loss With Related Parties

Often the sale or exchange of property may be between related parties.  Losses on the sale or exchange of property between related parties is not deductible.  This rule on nondeductible losses applies to both direct and indirect transactions, but would  not apply when a corporation distributed property to a shareholder in a complete liquidation of the corporation.  Below is a list of related parties.

 

–       Members of a family including brothers & sisters, half brothers & sisters, parents, grandparents, children, grandchildren and other lineal descendants.

–          An individual and a corporation of the individual owns 50% or more, directly or indirectly in the value of the outstanding corporate stock.

–          Two corporations that are members of the same controlled group- see Internal Revenue Code Section 267(f).

–          A trust fiduciary and a corporation if the trust or the grantor of the trust owns directly or indirectly 50% or more of the value of the outstanding corporate stock.

–         A grantor and trust fiduciary, and the trust fiduciary and beneficiary of any trust.

–          Trust fiduciaries of two separate or different trusts and the fiduciary and beneficiary of two different trusts, if the same person is the grantor of the applicable trusts.

–          A tax exempt organization and a person who directly or indirectly controls the organization, or a family member of the person who directly or indirectly controls the organization.

–         A corporation and partnership when the same person owns 50% or more in the value of the outstanding corporate stock and more than 50% in the capital interests or profits interest in the partnership.

–        Two different S corporations when the same person owns more than 50% of the value in the corporate stock.

–          Two corporations when one of the corporations is an S corporation if the same person owns more than 50% of the value in the outstanding corporate stock of both applicable corporations.

–        The executor of an estate and the beneficiary of an estate.  An exception exists though under situations whereby the executor is satisfying a pecuniary bequest.

–        Two partnerships when the same person directly or indirectly owns more than 50% (fifty-percent) of the profits interest or the capital interests in both of the partnerships.

–          A person and a partnership if the applicable person owns (whether it be directly or indirectly) more than 50% of the partnership profits interest or capital interest in the partnership.

The nondeductible rule as stated in the last two rules above would not apply to a sale, transfer or exchange of a partnership interest between related parties.  Furthermore, when determining ownership interests in partnership or corporation, certain attribution rules will apply.  For example, certain percentage shareholders in a corporation are deemed to own the stock that the is owned by the corporation.  Further, family attribution rules apply whereby an individual is deemed to own stock and partnership interest that family members (brother, sister, spouse, lineal descendants etc) own.

Speak with a Denver tax attorney and business attorney at The McGuire Law Firm if you have questions related to the tax implications of a business or individual transaction.  The McGuire Law Firm offers you a free consultation with a tax attorney and business attorney to discuss your issues and matters.

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Disposing of Section 197 Property

What is considered intangible property and how is the sale or transfer of intangible property taxed?  Intangible property could be considered personal property that has a value to it, but the property cannot be seen or touched.  Thus, in regards to intangible property consider property such as the goodwill from a business, which would be considered intangible property, or certain intellectual property rights such as a copyright or patent could be considered intangible property.  Certain intangible property is defined as a Section 197 intangible and is discussed more below.

Ok, so now that we have a better idea as to what would be considered intangible property, how is the sale of intangible property taxed?  The gain or loss on the sale of intangible property that has been held longer than one year, and that has been amortized or depreciated (and not treated as ordinary income via recapture rules) is considered a Section 1231 gain or loss, which has or will be discussed on other articles.  Thus, the remaining portion of this article focuses on 197 intangibles.  A Section 197 intangible would be certain intangible assets held for the conduct of business or a trade (or any activity operated for a profit) of which the costs are amortized over a fifteen year term.  Such assets would include: trademarks, trade names, goodwill, franchises, covenants not to compete when executed with the connection of a business acquisition, patents, copyrights, designs & knows (and similar items or processes), going concern value, customer or supplied based intangibles and licenses, permits or other rights granted by a government agency.

When disposing of such an intangible, it is important to note that a loss cannot be deducted from the disposition of the intangible you acquired in the same transaction, or through a series of transactions, as another Section 197 intangible you still have. You would increase the adjusted basis of the 197 intangible that you still retain, and if you retain more than one each intangible’s adjusted basis would be increased on a pro rata basis.  Furthermore, it is interesting, and important for a business purchaser to understand that a covenant not to compete, or similar type of agreement that would be considered a Section 197 intangible, cannot be treated as worthless or disposed of until the entire interest in the trade or business has been disposed of, that  was the basis or reason for entering into the covenant not to compete.

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Stock Sale

What is a stock sale?  How is a stock sale different from an asset sale?  Is a stock sale or asset sale better?  As a business attorney, these are common questions I hear from clients when they are considering selling their business.  A stock sale and an asset sale have advantages and disadvantages, which may me more pronounced to either the buyer or seller.  The article and video below have been prepared by a Denver business attorney at The McGuire Law Firm to provide information regarding a stock sale.  Please remember that the information provided on this site is for informational purposes and it is recommended that you always consult with your business attorney and/or tax attorney before entering into any business or individual transaction.

Unlike an asset sale, a stock sale is the sale of the corporate stock.  Thus, the corporate assets are not necessarily purchased, but the ownership of the corporation has changed.  Thus, with a stock sale the corporation remains.  This may be a benefit to the seller of the stock because they may only recognize capital gain on the sale of the stock, as opposed to the corporation recognizing gain under an asset sale if the corporation were a C corporation.  However, because the corporation remains, the liability of the corporation for previous acts “follows” the corporation.  Thus for liability purposes and exposure to prior corporate actions, many buyers would prefer an asset sale.  Furthermore, when buying the stock of a corporation, the buyer does not receive the same step up in basis for the corporate assets that they would have, had they purchased the assets through an asset sale.  Thus, the depreciation amounts carry over through a stock sale from the seller to the buyer, which is typically a disadvantage to the buyer.  The step up in basis to the purchase price of the assets would generally lead to a larger deduction and thus tax benefit.

There are other matters and issues to consider between a stock sale and an asset sale.  If you have questions related to the sale of your business, the purchase of a business or another business transaction, please contact The McGuire Law Firm to speak with a Denver business attorney.

Schedule a free consultation with a business attorney in Denver or Golden Colorado by contacting The McGuire Law Firm.