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Denver Business Attorney Discusses the Definition of Liability in Partnership Context

A partnership is a very common entity format for a small business.  Small business owners can form a partnership as a general Denver Small Business Attorneypartnership, limited partnership, limited liability limited partnership (LLLP) and a limited liability company (LLC) is a partnership as well.  The treatment of partnership liabilities can have large impact to the taxation of the individual members as items of gain, loss and deductions etc. are passed through to the individual members or partners. John McGuire, as a Denver small business attorney has drafted articles relating to partnership liabilities in certain contexts, but the article below is specific to what constitutes a partnership liability and how “liability” is defined in the context of a partnership and the applicable Internal Revenue Code sections and Treasury Regulations.

The Section 752 Treasury Regulations define the term “liability” by referring to the term “obligation.”  The term “obligation” is defined as any contingent or fixed obligation to make payment without regard to whether the obligation is otherwise taken into account for purposes of the Internal Revenue Code.

Below are examples of obligations:

–          Short Sale Obligation

–          Debt through a loan or note or other contract obligation

–          Tort obligation

–          Pension obligation

–          Derivative financial instruments- forward contract, an option or options, futures contracts

For the purposes of Internal Revenue Code Section 752 and in the context of a partnership, an obligation is a liability if, or when and to the extent that the obligation: creates or increases the basis of any obligor’s assets (including cash); gives rise to an immediate deduction to the obligor; or, allows for an expense that is not deductible in computing the obligor’s taxable income and is not properly chargeable to capital.  In Revenue Rule 88-77, the Internal Revenue Service ruled that unpaid expenses and accounts payable of a cash method partnership were not partnership liabilities or obligations.

For partners to share an IRC Section 752 liability, the partnership must be the obligated party.  If for example, another individual or entity is obligated and thus the obligor, the liability would not be considered a partnership liability unless an agent-principal relationship exists between the obligor and the partnership.

Under Section 1.752-5 of the Federal Treasury Regulations, a liability is an obligation to the extent that either: the obligation is not a Section 752 liability or the amount of the obligation exceeds the amount taken into account when incurring the obligation.  For these purposes the amount of the obligation is the amount a willing assignor would pay to a willing assignee in assuming the obligation via an arm’s length transaction.

Recourse Liability: A liability is treated as recourse to the extent any partner or a related person bears the economic risk of loss for the liability.  A related person is defined in Regulations Section 1.752-4(b).

Non-Recourse Liability: A liability is treated as non-recourse liability to the extent that no partner or related party bears the risk of economic loss for the liability.

A Denver small business attorney at The McGuire Law Firm can assist you and your partnership in understanding what constitutes a partnership liability, the type of liability and the impact of such liability.  Mr. McGuire holds an advanced degree in taxation, which is applied to business issues given the close relationship of business and tax.  Law offices in Denver  and west metro.

Contact The McGuire Law Firm to speak with a Denver small business attorney and schedule your free consultation.

 

Common Business Tax Returns & Forms by Denver Small Business Attorney

Many small business owners ask their tax attorneys and business attorneys what type of tax return they need to have prepared and filedDenver Small Business Attorney with the Internal Revenue Service.  The article below has been drafted by a Denver small business attorney regarding common tax returns and forms filed by small businesses.

If you are a sole proprietor or single member limited liability company you will file a Schedule C with your 1040 Individual Income Tax Return to report your business income and expenses.  The net income from your business will also be reported on Schedule SE to calculate the self employment tax.  A single member limited liability company is considered a disregarded entity and thus unless the limited liability company makes the election to be taxed as an S Corporation it will file a Schedule C as if it were a sole proprietor.

If you are a partner in a multi-member limited liability company or a partnership you will file a 1065, which is a U.S. Return of Partnership Income.  The 1065 will state all of the partnership’s income and expenses and thus the ordinary business income (or loss) of the partnership.  The partnership’s income (or loss) and other items are passed through to the members or partners and reported on Form K-1, which is titled K-1 Partner’s Share of Income, Deductions and Credits etc.  Thus, the K-1 is the form by which the income and other items is reported for each partner to the Internal Revenue Service.

If you are a shareholder in a corporation, and the corporation has made the election to be taxed as an S Corporation, the S Corporation will file an 1120S, which is a U.S. Income Tax Return for an S Corporation.  The 1120S will state the S  Corporation’s income and expenses and the S Corporation’s business income or loss. Like a partnership, an S Corporation is considered as pass through entity and the income, loss and other items are passed through to the shareholders on a Schedule K-1, titled Shareholders Share of Income, Deductions and Credits, etc.

If your business sold assets during the tax year, you will likely need to file Form 4797.  Form 4797 is titled Sales of Business Property and as the title would dictate is used to report the sale of business property and gain from such sale(s) of property.  Form 4797 also calculates depreciation recapture amounts and involuntary conversions.

The McGuire Law Firm can assist you with your tax questions & issues, tax returns & forms, tax planning, the drafting of business documents and overall legal advice regarding business operations.

Contact The McGuire Law Firm to speak with a Denver small business attorney or Denver tax attorney.  We offer a free consultation to all potential clients.

Denver Business Attorney Writes About Marketing Your Business for Sale

Just as you had to market your business to make the business successful and grow, you must also market your business properly to Denver Small Business Attorneysell your business.  Although, many of our clients have succeeded in marketing their business product or business service, when it comes time to sell their business, they do not know how to market the business for sale and thus ask our Denver business attorneys, “How do I market my business for sale?”  The article below has been drafted by a business attorney at The McGuire Law Firm and should shed some light on marketing your business for sale or transfer.

Consider and Find Potential Buyers: If you know you will be selling your business, it never hurts to be considering potential buyers years in advance.  The potential buyer never has to know you are considering them a potential buyer, it simply helps to put a list together.  When considering these potential buyers, you should look for a “synergistic” buyer that is involved within your industry in some form or fashion, and may be willing to pay top dollar for your business.  This synergistic buyer may even be a competitor.  In addition to competitors, look at vendors, key management personnel, key employees and companies who purchase businesses in your industry.

Screen Potential Buyers: Acquire as much information about each potential buyer and thus “qualify” each potential buyer prior to providing any information about the business.  If you must disclose any information, make sure you have a non-disclosure agreement in place with the proper third party prior to disclosing any information.  Judge and rank all potential third party buyers that you have any contact with and determine if you should continue negotiations.

Meet With the Potential Buyers:  After screening contact and meet with the potential buyers you feel would benefit the most from acquiring your business and that have the financial ability and interest in buying your business.

Now the marketing and salesman in you must enter the room.  Provide your top prospects with an offer memo, sometimes called a offering memorandum.  The memorandum will describe the business and value the business.  Further, this document can be the initial step to show and prove to the potential buyer why they should buy your business and why they should pay the purchase price you are requesting for the business.  This document will set the foundation for future negotiations and can be followed up with due diligence documents to substantiate the figures in the offering memorandum.  You must sell your business within the offering memorandum and the due diligence documents.  Do not just provide three years tax returns and income statements.  Show the increase in profit margins, decrease in expenses, industry growth and reasons the business is worth the money you are asking!

When a potential buyer expresses interest in your business, obtain a letter of intent, which is a document whereby the potential buyer agrees to follow through with the purchase, given the documentation provided through due diligence shows that the prior information provided is correct.  Of course, valuation and issues uncovered through due diligence can become quite subjective.

At this point it is time to move forward with the due diligence, negotiating and selling the business!  A Denver business attorney at The McGuire Law Firm would welcome the opportunity to discuss your business and the potential sale of such business with you.  We represent both buyers and sellers at all levels of the transaction, including analyzing the tax implications of a sale or purchase.

To speak with a business attorney in Denver, contact The McGuire Law Firm and schedule a free consultation.

What is Due Diligence by Denver Business Attorney

What is due diligence?  Business attorneys are commonly asked this question when business owners are considering selling Denver Business Lawyer their business or individuals are looking at buying a business or merging with a business.  Due diligence is a process and very important process!  Due diligence can be considered a legal, business and financial investigation of the company.  In conducting such investigation the seller is confident in the purchase price they are requesting and the buyer is confident they are paying a purchase price that adequately reflects the value of the business or business interest they are purchasing.  A Denver business attorney has drafted this article and below is a list of items or areas to consider when performing due diligence.

Financial Review: When performing due diligence you should review at least the prior 3 year financial history.  This review can be completed by reviewing income statements, balance sheets, profit margin analysis, tax returns, depreciation schedules, sales reports, list of assets, fixed expenses and any other item that can be produced.  As a buyer, it is important to keep in mind that you can request any document(s) you choose, but you also should attempt to keep such requests reasonable based upon the circumstances.

Employee Information: A chart or breakdown of employee information such as number of employees, key employees, employee pay and salary, employee benefits & benefit plans, employee qualifications, hiring process procedure.

Intellectual Property: Documentation regarding any patents, copyrights, trademarks, trade names, trade secrets etc.  This should including documents relating to royalties for use of any intellectual property.

Operations: A statement or chart showing how the business operates.  What is the process at each level for the business to be successful?

Customer Base Profile: A potential buyer may request a customer list or customer profile.  If I were representing a seller, I would likely be hesitant to disclose an entire customer list, but rather may provide a list of the total number of accounts or customers.

Legal and Liability Issues: A potential buyer will request disclosure of any known current legal claims or issues or potential legal claims or issues.  Additionally, the seller should be prepared to provide copies of all licenses and permits used in the operation of the business.

Contracts: Copies of contracts with all 3rd parties will likely be requested by a potential buyer.  Further, the seller should be prepared to provide copies of all lines of credit, loans and notes with third party lenders.

A business attorney at The McGuire Law Firm can assist you as a seller or a potential buyer in the due diligence process.  Our business attorneys in Denver are available to consult and advise regarding your business questions and issues.

Contact The McGuire Law Firm to schedule your free consultation with a business attorney!

 

Denver Tax Lawyer Explains a Schedule C

What is a Schedule C?  This is a common question asked of business attorneys and tax attorneys.  The article below hopefully will Denver Tax Attorney help answer the above question and give additional insight as to the importance of the Schedule C.

IRS Form Schedule C is titled Profit or Loss From Business and is a schedule attached your 1040 Individual Income Tax Return if you are required to file a Schedule C.  In general, self employed individuals or a single member of a limited liability company must file a Schedule C with their 1040 tax return.  Additionally, some individuals do not realize they are required to file a Schedule C.  If you receive a 1099 for non-employee income or miscellaneous income, this income should likely be reported on a Schedule C.  For example, an individual may work for an employer and receive a W-2, but perhaps this individual works for another company a few days a year and is issued a 1099 for this secondary income.  The third party would likely issue a 1099 for the monies paid and this income should be claimed on a Schedule C, or you may be able to file a Schedule C EZ under certain circumstances.

A Schedule C is used to calculate your net income and thus the amount of income you are taxed on.  On the Schedule C, you will state you gross receipts, and other income and then your allowed expenses to calculate your net income.  Allowable expenses would be those related to the operation of the business and a few are listed below.

–          Advertising

–          Car and truck expenses

–          Depletion

–          Depreciation

–          Interest

–          Contract labor

–          Commission Payments

–          Legal and Professional Payments

–          Rent

–          Office Expenses

–          Office Supplies

–          Taxes & Licenses

–          Meals & Entertainment

–          Wages

–          Travel

–          Utilities

–          Other Expenses

Once your net income has been calculated the net income is then stated on Schedule SE, which is used to calculate your-self employment tax.  Self employment tax is stated on Form 1040 as a tax amount and half of the self employment tax can be deducted as an adjustment to income.  Your net income from the Schedule C is also stated on page one of the 1040 as income and is added to other income in the overall calculation of your federal income tax.  Thus, if you are self employed individual or the single member of a limited liability company (LLC) the Schedule C is a vital piece of calculating your total tax due.

A Denver business attorney or tax attorney at The McGuire Law Form can assist you questions and issues regarding your business and the taxation of your business entity.  Further, we can assist you with tax planning matters and analyze the tax implications from specific transactions.

Contact The McGuire Law Firm to speak with a Denver tax attorney or business attorney and schedule a free consultation.  Offices in Denver and Golden Colorado.

 

Preparing to Sell a Business by: Denver Business Attorney

You have worked hard and built a successful business.  Your business may have significant value and could provide additional Denver Business Attorneyretirement funds or significant money for retirement.  But, how do I go about selling my business or my business interests?  This is a common question clients ask a Denver business attorney, and a very important question.  How you prepare to market and sell your business may impact the overall purchase price you are able to obtain and the ease at which you are able to sell the business or interest.  The article below, drafted by a Denver business attorney at The McGuire Law Firm to discuss issues to consider when preparing to sell your business.

First, the seller should obtain realistic valuations and these valuations may differ depending upon the type of business being sold, the assets of the business and the potential buyers of the business.  The seller should look at the value of the business as a whole from two perspectives: one from the point of view of a financial buyer(s) who has no business connections or synergies and two, from the perspective of a strategic buyer who has a business connection or motive and may be willing to pay a premium.  A realistic valuation of the business can assist in discussing realistic purchase prices with the potential buyer from the beginning.  Given the purchase price is typically the most common pitfall, it can be beneficial to discuss the purchase price from the beginning.  When the purchase price is discussed and based upon a realistic valuation, you limit certain issues that could create problems later in the negotiations.

Seeking a potential buyer is an important step in selling your business, but is discussed by our business attorneys in a separate article.  The potential buyer will want to conduct their due diligence, which is discussed below.  It is recommended that you enter into a non-disclosure agreement prior to disclosing and providing information that is requested by the potential buyer.

The more organized you are, the easier it will be to provide the documents requested from a potential buyer.  Further, you will want to make sure you can provide all documents that are reasonably requested.  The inability to provide certain documents can weaken your position and thus lessen the purchase price.  The list below is a general list that you could expect a potential buyer to request.

 

–          Letter or certificate of good standing with the Secretary of State, and any necessary certificates from states in which you are operating;

–          Current financial statements (income statement, balance sheet etc) and prior three years financial statements;

–          Copies of current contracts with third parties;

–          Current list of assets, fair market value and any encumbrances;

–          List of any intellectual property such as copyrights, trademarks, patents;

–          List of other business loans and lines of credit;

–          Conduct a judgment and lien search;

–          Copies of appraisals;

–          Prior three year tax returns;

–          Customer list;

–          Profit and gross margins analysis;

–          Sales & Marketing Summary (price points, lead generation, training etc);

–          Disclosure of current or potential liability and litigation;

–          List of employees, employee benefits, pay structure etc.

The above list is a general list, but you should expect a similar request from potential buyers while they conduct their due diligence.

A Denver business attorney at The McGuire Law Firm can assist you with selling your business.  From the preparation to the drafting of documents and negotiating, we will assist you.

Contact The McGuire Law Firm to schedule your free consultation with a Denver business attorney.

 

Limiting or Expanding Corporate Provisions by Denver Small Business Lawyer

Overall corporate planning may require options to modify, limit or expand provisions that are authorized by statute.  Certain Denver Business Attorneyprovisions may only be included within the Articles of Incorporation, some provisions included within the corporate bylaws and some made via other corporate action.  The chart below drafted by a Denver business attorney at The McGuire Law Firm outlines sections of the Colorado Business Corporate Act allowing for a modification of the statutory rule, the type of modification and where within the corporate documents such modification should occur.

SectionModificationCorporate ArticlesCorporate BylawsOther Corporate Action
7-101-401(36)Creating Voting GroupsX
7-102-107Prohibiting Emergency BylawsX
7-103-101Limiting Corporate PurposeX
7-103-102Limiting Corporate PowerX
7-106-101Additional Classes of SharesX
7-106-102Authorizing Series SharesX
7-106-202Reserving the power to issue shares to shareholdersX
7-106-202(6)Prohibiting the issuance of par value shares at less than parXX
7-106-203(2)Providing personal liability to shareholders or subscribersX
7-106-204Prohibit or restrict dividendsX
7-106-205(2)Prohibit or restrict share rights or optionsX
7-106-207Prohibit/restrict uncertified securitiesX
7-106-208Implement transfer restrictionsXX
7-106-301Provide or restrict preemptive rightsXXX (per shareholder agreement)
7-106-302Prohibit/restrict the reissuance of reacquired sharesX
7-106-401Prohibit/restrict distributions to shareholdersX
7-106-401(7)Requiring designations, restrictions or reservations for distributions of par value sharesXX
7-107-101Establishing time & place of annual meetingX
7-107-102Authorizing persons to call special meetingsX
7-107-102(3)Establish place of special meetingX
7-107-104(1)Prohibiting shareholder written consentsX
7-107-104(1)Permitting consent by shareholders holding a majority of the sharesX
7-107-104(2)Prohibit/restrict consent by faxX
7-107-105(2)Require the purpose in notices of annual meetingsX
7-107-105(5)Require notice for adjourned shareholder meetingX
7-107-107Fix record dateX
7-107-108Prohibit/restrict electronic communication for shareholder meetingX
7-107-202Change one vote per shareX
7-107-204Provide for recognition of beneficial owner of nomineeXXX (board resolution)
7-107-206(1) & 7-107-208Change quorum of shareholders from majorityX
7-107-206(3)Increase voting requirement of shareholders from majorityX
7-107-207Provide for voting groupsX
7-107-209(2)Provide for shareholder notice to use cumulative votingX
7-108-101(1)Eliminate Board of DirectorsX
7-108-101(2)Limit or delegate authority of boardX
7-108-102Establish qualifications for board membersX
7-108-103Establish number of directorsX
7-108-104Establish classes of directorsX
7-108-106Stagger terms of board membersX
7-108-108Provide removal of director only for causeX
7-108-110Limit manner to fill director vacancyX
7-108-111Limit directors fixing their own compensationX
7-108-201Prohibit or restrict electronic communication for director meetingsX
7-108-202Prohibit/restrict director written consentsX
7-108-203(1)Require date, time and place in the notice of regular director meetingsX
7-108-203(2)Require different period of notice for special director meetingsX
7-108-205(1)Change quorum of board from majorityX
7-108-205(3)Change vote of board from majorityX
7-108-206Limit the creation and authority of committeesX
7-108-301Delegate and designate authority of officersX
7-108-303(4)Limit removal of an officerX
7-108-402Limiting personal liability of corporate officers and directors.X
7-108-105Limiting application to a court regarding indemnification by directorX
7-109-107Limiting indemnification of employee, officer and agentsX
7-110-102Limiting board approval of administrative amendments to articlesX
7-110-103(5)Requiring greater than a majority vote to amend articlesXX (adopted by shareholders)X (board resolution)
7-110-201(1)Reserve power to amend bylaws solely to shareholdersX
7-110-202Allowing shareholders to amend bylaws to increase quorum and voting requirementsX
7-111-103(5)Requiring greater than majority vote for mergers or share exchangeXX (adopted by shareholders)X (board resolution)
7-112-101(2)Requiring shareholder approval for ordinary sales, pledging of assets or mortgages
7-112-102(6)Requiring greater than majority vote of shareholders for sales outside the normal course of businessXX (adopted by shareholders)X (board condition to effectiveness of the applicable transaction)
7-114-102(5)Requiring greater than majority vote of shareholders for dissolutionXX (adopted by shareholders)X (board resolution)

Contact The McGuire Law Firm to schedule your free consultation with a Denver business attorney!