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The McGuire Law Firm provides a free consultation with a Denver business attorney.  If you own a business or are considering forming a business, we can help you.  From business formation and structure all the way to the sale or purchase of business, and business contracts, a Denver business attorney at The McGuire Law Firm can help you!

Contact The McGuire Law Firm to schedule a free consultation with a business attorney in Denver, Colorado or Golden, Colorado.

Personal Goodwill by Denver Business Attorney

Typically the sale of a corporation through an asset sale will result in two levels of tax when dealing with a C Corporation.  There is likely to be taxable gain to the corporation, and a taxable distribution to the shareholders of the corporation.  Hence, the term “double taxation” that has been used to describe the corporation paying income tax and shareholders being taxed on the distributions.  There is a potential strategy that shareholders of a corporation (likely a closely held corporation) can use to avoid this double taxation.  This strategy would involve the shareholder taking the position that a portion of the price paid (the purchase price) is for personal goodwill.  Because this portion being paid is for personal goodwill, it should be taxed as capital gain to the shareholder.  Thus, the amount allocated as personal goodwill is not taxed as corporate income, and receives capital gain treatment.  This sounds too good to be true, and in many instances it may be, or can be reviewed, scrutinized and challenged by the IRS.  Thus, it is very important that the shareholder(s) consult with their tax attorney, business attorney and/or another tax professional prior allocating a portion of the purchase price as personal goodwill.  The article below has been prepared by a tax attorney in Denver at The McGuire Law Firm to provide additional information regarding personal goodwill.

The idea or concept of personal goodwill is based upon the notion that a certain portion of the businesses success can be attributed to an individual or individuals.  For example, perhaps the individual shareholder has wonderful relationships with clients, and thus a good deal of the businesses success may depend on this individual.  Further, the relevant court cases display that covenants not to compete and the asset purchase agreements play important roles in determining personal goodwill.  In general, the more recent cases have held that if a taxpayer (shareholder) enters into some form of employment agreement or a covenant not to compete with the corporation, the personal goodwill would likely be transferred to the corporation, and thus a corporate asset as opposed to an asset of the taxpayer (shareholder).  Furthermore, it is very important that the parties properly document the personal goodwill in the negotiations and the asset purchase agreement. The court is likely to review the communications between the parties and the purchase agreement to check for the existence of the personal goodwill, which likely would or should be discussed and included within the agreement if in fact a portion of the purchase price is being allocated to personal goodwill.  In addition to reviewing the related documents to the transaction, it may be wise to obtain a third part valuation to establish the personal goodwill and value of such personal goodwill.

The above article has been written by John McGuire, a tax and business attorney in Denver, Colorado and the founding partner of The McGuire Law Firm.  You can contact Mr. McGuire at 720-833-7705 or John@jmtaxlaw.com.

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S Corporation Stock and Debt Basis General Matter

Why do shareholders in an S Corporation care about their stock basis and debt basis?  A shareholder’s basis in the S Corporation stock or debt is very important for multiple reasons.  The article below has been prepared by a tax attorney and business attorney at The McGuire Law Firm to provide additional information regarding the above issue.  Please remember to always consult your tax or business attorney regarding your specific issues.

S corporation shareholders may be limited to the amount of loss they can claim.  Even if the K-1 issued to the shareholder shows a loss, this does not necessarily mean the shareholder can claim the loss on their 1040 individual income tax return.  There are three loss limitations to a shareholder of an S corporation.  These loss limitations are as follows: 1) At risk limitations; 2) Stock Basis and Debt Basis Limitation; and. 3) Passive Activity Loss Limitations.  Each limitation must be met, starting with a shareholder’s stock basis and debt basis in the S corporation stock for a shareholder to claim a pass through loss.  This article will discuss stock and debt basis.

Unlike a C corporation, a shareholder of an S corporation will recognize an increase or a decrease in their stock basis each year based upon the operations of the corporation, which is related to the K-1 that is issued to the shareholder.  The shareholder is responsible for tracking their S corporation stock basis, not the corporation.  The K-1 that is issued to the taxpayer will show the amount of non-dividend distributions that the shareholder has received, but does not state the taxable amount of the distribution.  The taxable amount of a distribution is dictated by the shareholder’s basis stock basis.  If a shareholder receives a non-dividend distribution from an S corporation, the distribution can be tax free to the extent of the shareholder’s stock basis.  If the shareholder has a stock basis in excess of the non-dividend distribution, the distribution may be tax free.

If a loss is allocated to the shareholder, the shareholder must have sufficient stock basis (or potentially debt basis) to claim the loss or deduction on their 1040 individual income tax return.  Thus, a shareholder’s stock and/or debt basis in the S corporation can dictated whether or not or how much of a loss or deduction can be taken by the shareholder and is why a shareholder should care about their basis.  Furthermore, such basis also provides the amount by which the shareholder can take a non-dividend distribution tax free. In later articles, we will discuss how such stock basis is computed and other related issues.

If you have questions related to your S corporation you can speak with a Denver tax attorney and business attorney by contacting The McGuire Law Firm.  A free consultation is provided to all potential clients.

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What is a Holding Company

What is a holding company?  Generally, a holding company could be viewed as a company that owns the stock or interests in another company.  For example, Corporation A  could own 100% of the stock of Corporation B and thus Corporation A would be a holding company.  A holding company can potentially reduce risk and exposure and also allow one company to own and control multiple businesses.  These ownership and control issues can make a holding company attractive for certain business operations.  The video below has been prepared to provide additional information regarding a holding company.  Please remember, the information provided on this website is solely for informational purposes.  It is recommended that you always contact your business attorney and/or other professional advisers prior to making any business decisions.  You can speak with a Denver business attorney by contacting The McGuire Law Firm.

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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.

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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What is a Limited Partnership?

What is a limited partnership? Previously, a Denver business attorney from The McGuire Law Firm has discussed certain types of entities including partnerships in previous articles.  The article below will discuss a limited partnership.

A limited partnership could be considered a type of hybrid business structure because there are multiple types of partners/members. In a limited partnership there must be at least one partner who is liable for the debts of the partnership, and other business obligations.  Additionally, there must be at least one limited partner who is not liable and responsible for the business.  In comparison to a general partnership, a limited partnership cannot be formed simply by conduct.  Remember, a general partnership can be formed when two or more people begin conducting business for a profit.  A limited partnership must file the appropriate forms and papers with the necessary state agency such as the secretary of state.

The general partner will have management authority and will thus operate and manage the partnership and related business affairs.  The limited partner acts more as a passive investor, and does not have the responsibility of managing the business.  Thus, what can you compare a limited partner to?  In many respects, a limited partner is similar to a shareholder in a corporation.  The limited partner invests in the partnership and under the worst case scenario they may lose their investment, but such limited partner is not responsible for the debts and obligations of the partnership.  If a limited partner does exert too much control or dominance over the general partner or general partners, the limited partner could actually be liable for the business debts.  By exerting such control, the limited partner has de facto become a general partner of the limited partnership and thus exposed themselves to liability.  Different acts control such issues within a limited partnership and state law and case law should always be researched and reviewed.  Many current laws also allow business agreements that tailor the relationship between the partners and between the partners and the business. This may include tailoring the fiduciary duties a partner may have to the partnership and a partner not being liable for a breach of a fiduciary duty when one would expect such partner to be liable.  In many respects, it appears the fiduciary duties of a partner in a limited partnership can be limited more so than in a general partnership.

For tax purposes, a limited partnership is a pass through entity whereby the entity is not taxed, but items are passed through to the individual partners.

The one major drawback to the limited partnership is the exposure to the general partner.  Thus, most general partners within a limited partnership today would be corporations.  Because of the limited liability afforded to those who own and run the corporation, a limited partnership with a corporate general partner should help prevent personal exposure.

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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 Business Attorney John R McGuire

As a business attorney, John McGuire counsels small to medium sized businesses on a variety of issues and transactions.  Below is a short outline of some of the matters in which your business may be able to use the services of a business attorney.

Business Formation & Structure

The formation and structure of your business can have tax implications, liability implications, impact the sale, transfer or disposition of your business and create many other issues.  If you have questions regarding how to form or structure your business, it may help to discuss this matter with a business attorney.

Business Contracts & Negotiations

As a business operates it will inevitably enter in to business contracts & agreements and these contracts may require certain negotiations.  A business attorney can assist you in drafting these contracts and/or reviewing them so as to protect your interests, as well as advise and educate you regarding the terms of the contracts and the overall exposure from such agreements.

Tax Implications of Certain Business Transactions

A business attorney with a background in taxation maybe also be able to advise a business and the business owners as to the tax implications of a business transaction.  Most every business transaction whether it be a purchase, sale, transfer or other disposition will have some type of immediate, short term and/or long term tax impact.  Actually, if you are business owner, ask yourself the last time you entered into a business transaction and one of your primary concerns was not a tax concern or tax questions.  John McGuire holds an advanced degree in taxation known as an LL.M. and applies his knowledge in tax to his client’s business situations and transactions.

Business or Asset Acquisitions & Sales

If you are considering selling your business or buy another business, or purchasing or selling business assets, a business attorney can assist you with drafting or reviewing the proper documents, advising you of specific issues and negotiating the terms of such transaction.

The above examples are somewhat general and just a few of the ways in which a business attorney may be able to assist your business.  You can speak with a Denver business attorney at The McGuire Law Firm through a free consultation if you have questions or a matter that you feel you need assistance with.  John McGuire has prepared the video below to provide additional information, and hopes you find it useful.  Please feel free to contact The McGuire Law Firm at anytime.

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