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THE VALLEY BUSINESS JOURNAL 16 www.TheValleyBusinessJournal.com March 2018 Family Owned & Operated 100% Background Checked Team 24/7/365 Emergency Service Fully Licensed, Bonded and Certified Insurance Approved and Preferred Water, Flood, Fire, Smoke, Mold Damage? With Pulido you are family. We will get you through this. The most trusted Restoration company in the Temecula valley since 1989 Lic# 710901 The New Tax Law and Business Planning: What You Need to Know LEGAL by by Andrea Steve Fillingim Shoup The Tax Cuts and Jobs Act recently signed into law has implications for personal tax planning and estate planning, but its primary effect is on all sizes of businesses. If you are a business owner (or plan to start a new business) there are some important changes to keep in mind that may affect your business structure and strategies. 20% Deduction for “Pass-Through Businesses” 95% of US businesses use “passthrough” business structures for taxation. These include sole proprietors, partnerships and S-corporations, where the business income is essentially taxed as personal income, at the corresponding personal tax rate. The new law now provides for a 20% deduction on that income, a change that is bound to benefit some small to medium size business owners by lowering their tax bill. However, there is a caveat where service-based businesses (lawyers, accountants, doctors, etc.) can only claim the deduction if their annual income is less than $315,000 for married couples, or $157,000 for single filers. The definition of ‘service-based’ business in the new law is far from clear, and some business owners are considering ways to shift or diversify their work activity in order to claim the deduction. Corporate Tax Rate Lowered From 35% to 21% The most significant part of the new tax law is the reduction in corporate tax rates from 35% to 21%. Lower corporate taxes could motivate some businesses to convert to a corporate tax structure, especially if they fall within the exception to the 20% business income deduction. Selecting a Business Structure Many small businesses choose to use a simple legal and tax structure for their business, to avoid the paperwork and administration of a C corporation. This is probably still the right choice for businesses with a mid-level income, but in some cases the new tax law might make the C corporation election more beneficial. Naturally, this is a complex decision that requires the advice of both tax and legal professionals to evaluate the effect of tax reform on existing and planned business structures. Here are some of the key factors that you might have to consider in your business planning process: • The type of business you own (service or capital goods, or some combination). • The amount of pass-through income (after deductions) for service-type businesses. • Whether a C corporation structure is suitable for your business, and how it might affect partners, investors or family members. • What steps are needed to convert your existing business structure, and if the tax savings is worth the effort and expense. • Accelerating expenses to decrease business income. • How your business is included in your estate plan, along with the distribution of ownership after death. • Business succession planning for family businesses. • How to maximize retirement fund contributions or charitable giving to reduce annual income. If you are a business owner and have questions about how tax reform might affect your company’s taxable income, now is a good time to consult your attorney and accountant. The tax law is in effect for 2018, and choices that you make now will affect this year’s tax bill. Please contact Andrea Shoup at 951-445-4114 for guidance on estate planning and business planning under the new tax reform act. 951-296-9090 Teampulido.com “ The most significant part of the new tax law is the reduction in corporate tax rates from 35% to 21% New hires? Awards? Promotions? Share your news with us
March 2018 THE VALLEY BUSINESS JOURNAL www.TheValleyBusinessJournal.com Thinking of Going into Business with Others: Ask the Right Questions to Avoid the Wrong Outcome LEGAL by John Messina, Esq. The last thing I wanted to do after graduating from law school was practice law as a civil litigation attorney. The contentious nature of the litigants and their attorneys, combined with the gamesmanship of it all, makes most rational beings avoid the courtroom like the plague. But, what do I do? I’m a civil litigation attorney, and I cannot think of anything else I’d rather do for a living. However, my clients, understandably, do not share my enthusiasm for the litigation process. For them it equates to torment and reversal of fortune. For many, a victory does not necessarily mean a “win” and even the prevailing party may feel like the loser after considering the litigation costs and emotional strain. Litigation is society’s way of righting a wrong but, truth-be-told, so many issues litigated today need never have been the subject of a lawsuit. With business litigation, had people just dealt with the “What ifs?” prior to formalizing their business relationships, they would not later have to deal with the “What now?” It’s the “What now?” that ultimately serves as the foundation for bitter litigation. Friendships and families are forever divided over matters that could have easily been avoided if, during the excitement of the proposed business venture, simple “What if” questions were asked and honestly answered by all parties. Some of these “What if” questions are illustrated in this story. 1 Michael, a longtime client, owned a manufacturing company. Michael came to incorporate his business and relied on my legal expertise for his company, vendor, employee, and customer contracts. It was no surprise when he asked me to create the documents under which Andrew, a long time trusted friend and employee, was to become a shareholder. Andrew and Michael had been working together for over three years and Michael appreciated Andrew’s efforts in helping him grow his business. Both were excited about the prospect of Andrew becoming an owner and wanted the legal “paperwork” completed quickly. As instructed, Michael clarified it to Andrew it was important for him to have separate legal representation because I was solely acting as Michael’s attorney and had to act in his best interest. Andrew agreed and retained an attorney to assist him. As happens usually, the parties are so excited about the future they consciously avoid discussions which might dampen their enthusiasm or jinx the entire venture. Michael and Andrew were no exception. Michael, however, being a little more sophisticated than many, resisted the temptation to proceed without addressing fundamental “What if” questions and asked Andrew: 1. What if Andrew, you or I decide we want to devote less than our “full-time” efforts to this company; how are we to address our respective ownership interest? 2. What if the company, needs an infusion of money; are you Andrew willing to obligate yourself on a loan or will you be willing to contribute some of your own cash? 3. What if either you or I become sick or incapacitated and cannot work for an extended period; how are we to equitably compensate the burdened shareholder. 4. Andrew, knowing I hope to retain the controlling interest; how will we address growth where we might deem it in our best interest to extend an offer of ownership to others? How might we handle the dilution of interest? 5. What if one of us should die; how are our families to be treated? 6. What if we reach an impasse regarding a business decision; how shall our impasse be ultimately resolved? 7. What if one of us, independent of the other, does something that causes the company to get sued? Who will pay for the cost? Who will pay for the increased insurance premiums? While there are a numerous other “What if” questions, just posing these few can sometimes lead to unexpected revelations. In Michael and Andrew’s case, Michael found out Andrew was not interested in the responsibilities that come with ownership. Andrew decided, after considering the “What ifs”, he would rather be an employee working in another industry. Andrew left Michael’s company and they parted as friends. Had Andrew become an owner, his lack of commitment would have soon become an issue. Just a few months after Andrew left, demand for a product developed by Michael skyrocketed and Michael was forced to infuse the company with over $200,000 to cover production costs. Michael launched his company to the next level and remains the sole shareholder. Bottom line; business formations, with even just one other person, must be treated with the same care and consideration one would give to the most important decisions of their life. When you consider all the time and money you will spend building your business, in contrast to losing it all because of inadequate agreements and documentation, stellar legal representation at the formation stage is a must. Operation agreements, shareholder agreements, management agreements, buy-sell agreements are expensive but still only a fraction of the cost of litigation. 1 The story is based on “real life” events however; the facts and parties are highly disguised to protect my client’s privacy and, selfishly, my career. John Messina, Founding Partner of Messina & Hankin LLP, has offices in the Temecula Valley and Newport Beach – John can be reached at (951) 894-7332 or at JMessina@MessinaHankinLaw.com. 17
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