Last month I pointed out that there are significant disadvantages to forming what is called a C Corporation. That’s what most of us think of as a regular corporation, a corporation that files tax returns for its own income and losses and pays taxes at a corporate rate, not an individual rate. Read more >>
Like many lawyers I often suggest that clients with a small business, such as a motorsports dealership, incorporate. However, if you incorporate and do not make a special election to be taxed as an S Corporation (where the shareholders pay the taxes on corporate profits) your corporation will be a separate taxpayer known as a C Corporation. A commentator on tax law once compared forming a C Corporation to a mouse jumping into a barrel: easy to get into and hard to get out of. Read more >>
For the past several of months we have talked about creating different classes of equity for the purpose of granting different economic rights and different control rights to various owners of a company. The advantages of such a flexible equity structure are readily apparent when dealing, for example, with a key employee who becomes a minority shareholder or an outside investor who wants preferential treatment for the money he puts into the company. Read more >>
Recently my blogs have addressed the question of various types of equity ownership interests in motorsports dealerships. For example an incorporated dealership could issue common stock and preferred stock, with preferred stock representing a first claim on the earnings of a company and common stock representing future growth and appreciation in excess of the preferred return. Read more >>
Last month our blog addressed the issues of using different kinds of equity, for example issuing a preferred class of stock to one shareholder or a group of shareholders and a junior or common class to other shareholders. Comments about equity participation also apply to control. Many people tend to think of control as being a simple percentage of the stock and an equal percentage of the voting power of the company. However, I tell clients that control is like a pie, you can cut it into as many slices as you like. Read more >>
For a variety of reasons, a dealership may find it advisable to sell minority ownership (equity) interests to one or more new owners: a junior partner, a key employee, an outside investor or a family member for example. When doing this, there is a tendency to think of all corporate stock as being the same. If you sell 10 percent of the company to someone that means you sell 10 percent of the stock. Read more >>
Powersports dealers should understand the importance of separating dealership assets (inventory, accounts receivable, shop equipment, etc.) from real estate (the dealership building and surrounding land, including parking areas). Of course, many dealers own only the operating assets and lease the real estate from someone else. However, if you already own some of the real estate you use for your business, or if you are thinking about buying real estate, remember to keep the two assets separate. Read more >>
In my experience, most dealerships are incorporated. The primary reason to incorporate is to have the protection of limited liability. That means the corporation, not its individual shareholders, is liable for the company’s debts and other actions (except when, on a bank loan for example, the shareholders sign personal guarantees). Plaintiffs constantly seek ways to hold the individual owners, rather than the corporation, liable for corporate debts and other liabilities, personal injury accident, for example. A popular way of doing this is to try to “pierce the corporate veil.” When a plaintiff is successful in doing this, the shareholders (or in some cases officers, directors and employees) are individually liable for the corporation’s acts. Read more >>
One of the few benefits of hard times is the opportunity to make large tax-free estate planning transfers. In any tax year you can transfer $13,000 of cash or property to each of any number of individuals. If you have five children, you can make five $13,000 transfers. If your spouse joins in the gift, you can give $26,000 each year to each donee. If you have a long-term concern about passing your estate to your children, grandchildren or others and if the value of your company is depressed as a result of economic conditions this year, this could be a good time to make a gift or series of gifts, usually in the form of minority stock interests in a corporation, to your potential heirs. Each gift is valued the year you make it, and if you think the value of the company is going to go up when times improve, you can effectively transfer not only the present value but all of the future growth free from gift or estate taxes. Read more >>
Although many people never think about it, the biggest reason for forming a corporation is to protect the individual owner from personal liability for corporate acts. In the everyday business world, banks, landlords and other smart people get personal guarantees for corporate debts, leases and other obligations. Corporate limited liability doesn’t do you much good for the debts you personally guaranty. However, limited liability is vital when a catastrophe happens, like a horrible accident in which people are killed or badly injured. Read more >>
