Jan
Welcome to AB cast integrating legal tax accounting and business solutions. I’m Jonathan Allen. In this at episode, we will cover the overview of legal services provided by our firm.
Neil
Jan, perhaps we can begin this week’s episode with an overview of the types of legal services we provide
Jan
Some of the legal services that we provide and include business formation, international business, and foreign corporate ownership, mergers and acquisitions, sometimes known as purchase or sale of a business contracts, transactional planning, estate planning, and tax controversy.
Neil
When you discuss business formation and entity select with our clients, what are some of the options available?
Jan
There are several options when you’re looking at business formation and the business formation entity choice is really predicated on the type of business and where it’s going to be operating. Who’s operating it. And in what state it will be operated in.
Neil
What are some of the specific corporate entities that are in your toolbox as an attorney?
Jan
There are several different entity choices. There is a Limited Liability Company (LLC), an S corporation, a C corporation. And of course the ubiquitous schedule C.
Neil
So what is the primary reason one might choose an LLC versus an S Corporation or a C corporation?
Jan
Generally LLCs are chosen by individual clients because they have heard the LLC entities thrown about at cocktail parties, but there’s a, a huge distinction between limited liability companies and an S-corps, which are flow through entities that make the choice between an LLC and an S-corp quite distinctive. And there are lots of elements that we have to go back and review to determine whether or not an LLC should be used or whether or not an S-corp should be used or barring neither one of those two entities, whether or not we should go to a C corporation.
Neil
Jan, what’s the reason to have a business entity or a corporate entity?
Jan
From our perspective, there are two primary reasons for distinguishing an individual from their business. And one is risk mitigation utilizing a legal entity in order to in inhibit potential legal ramifications and tax minimization. So when we go back and we are looking at what type of entity should be utilized for any particular business, there are several reasons that we go back and several issues that we look at in order to determine which is the best fit for the client.
Neil
How do you explain the corporate veil and how that entity separates the business owner from their personal finances, from the perspective of a creditor?
Jan
A separate entity, such as an LLC, or corporation shields, an individual from the corporate or LLC liabilities, because they are individual entities in their own, right? So they are distinct from the individual and are looked at from a legal perspective, just as an individual would be distinct from the business.
Neil
So if we have a business owner, we’ll call him Bob, instead of being Bob incorporated, and everything just falls on Bob’s shoulders, the business entity allows Bob to protect his home, his personal bank accounts and his wife’s accounts, if she has them and separate those financially from the business itself and protect them from the creditors of the business. Is that correct?
Jan
Essentially, Yes.
Neil
Jan, what is a professional corporation in California?
Jan
A professional corporation is one that’s distinct from other types of corporate formations in that the entity itself anticipates a professional that is generally licensed by a governmental agency in the state of California. And you can think medical doctors, you can think CPAs attorneys, anyone in a profession that utilizes a license granted by the state of California, generally incorporates under what’s known as a professional corporation APC, which is the acronym for that entity.
Neil
So what’s basically the difference between a professional corporation in California and a normal form of corporation?
Jan
Essentially, what it does is a professional corporation goes back and ensures that the professional services are taxed appropriately under the code. If a professional incorporates, there is a section under the IRS that deals with professional services and there’s a different methodology for taxing professional services than other corporations. So the distinction is clearly that between regulated licensure of professionals in the state, as opposed to individuals that are just say running a regular corporation for pro or other types of services,
Neil
That makes sense. One of the things you often talk about Jan is if you’re going to form a business, one of the most important elements of that process is business succession planning. What is business succession planning?
Jan
It’s one of the most important aspects of the creation of an entity. When I talk to clients, I always start with the end in mind, and that might seem a little odd, but you can’t plan for something unless, you know, where you anticipate it. Ending corporate succession planning is a tool that we use in the formation of entities in order to guarantee in the event of death or disability of the owner or incorporator that the succession or the ownership and the continuation of the business is either wound up or continues and is allowed to continue through the operational documents of the LLC, the S Corp or the C Corp
Neil
Corporate documents like an operating agreement or a shareholders agreement really matter to a company. Why is it important to make sure these documents are structured correctly?
Jan
Because in the event of litigation, the first thing that an attorney’s going to ask for are the corporate or LLC documents of an entity. And the first thing that an opposing council will be looking for is whether or not the entity is fully formed. And the full formation of an entity is through the appropriate execution of the corporate governance documents. And that includes the operating agreement, shareholders agreement, the ledger, the bank resolutions, the minutes of directors and or shareholders and or members, all of those legal documents combine to show the entity is truly an entity and not just an incorporated pocket, but
Neil
Jan, what are the primary issues when you’re forming an international business or when you’re dealing with foreign corporate ownership?
Jan
Essentially the issues are the same, except that we’re looking at differing foreign tax jurisdictions, other than the United States, the type of entities considered the types of entities chosen where the entities are chosen and how they are owned and, or not owned by individuals in the us, whether they’re subsidiaries or individual shareholders or members are all taken into consideration to determine again, the two main premises of international planning, and that is risk mitigation and tax minimization.
Neil
And then we support those with Alan Barron’s accounting and tax services.
Jan
Correct.
Neil
One of the crucial issues for an international business is the concept of transfer pricing. And that’s a complex legal issue. Can you give us an overview of what transfer pricing relates to and why it’s important to have sound legal counsel?
Jan
Transfer pricing is one of the most utilized audits that the IRS has in order to ensure that the profits from an entity are not going into a lower tax jurisdiction. And in order to ensure that that’s not occurring, the IRS will initiate, uh, transfer pricing on audit to ensure that the profits that are maintained in the us are indeed genuine profits and are not being manipulated by transferring products or services offshore at a far lower price than would normally be executed in a third party transaction.
Neil
You’re talking about arms length
Jan
Yes, arms length transactions, third parties, anything that goes back and defines the interaction between companies or entities in the us and outside the us as being li legitimate and not being used to transfer profits outside of the US.
Neil
And do FATCA issues and FBAR reporting requirements factor into your planning when you’re working on an international business?
Jan
FATCA was a process that the Internal Revenue Service and US Treasury utilized in order to aggregate consensus among taxing authorities around the world. So the signatories to FATCA are most of the major countries in the world that have all agreed that they’ll exchange information relating to entities and individuals within the jurisdictions that they control and exchange that information with treasury and the internal revenue service. So FATCA is always on the lookout for entities that are attempting to hide profits, offshore, hide identification of entities that they own offshore so that the revenue stream remains consistent through the countries in the world, in which it’s earned. I might note that it’s not only the US that is a signatory of FATCA, but there are several countries in the world that face the same issues that the US faces in terms of money being earned within a country and then being hidden offshore. So it’s a worldwide issue that’s attempted to be minimized by the utilization and being a signatory on FATCA FBAR is a foreign reporting requirement that is required of all entities, all US taxpayers, whether they’re individual or whether they’re companies subsidiaries. And the FBAR reporting is really a foreign bank accounting reporting process where it doesn’t really have an, the tax ramification it’s really for disclosure. So there’s two distinctions FATCA is for compliance FBAR is for information.
Neil
So basically if you’re considering an international business or foreign corporate ownership scenario, it’s not just the legal side of the equation. This is going to be a balance of legal tax and accounting issues. Will it not?
Jan
All of the three? Yes.
Neil
Jan let’s turn the conversation to getting into a business or out of one buying and selling a business. Do you think most business owners and professionals really understand what goes into selling their business or buy a business?
Jan
Clearly, I think the individual clients that we see coming into our office really don’t have a clear understanding of what is needed or required in order to sell or buy a business. The due diligence process is probably one of the most complex in any business transaction, but particularly if you’re buying or selling a business, the due diligence process really consists of accounting tax and legal components, all of which are comprised to ensure that whether you’re buying or you’re selling that the terms within the written agreement are accurate and reflect what it is that the business is doing or has done. It is probably the least understood process of virtually all transactions that we see come into this office.
Neil
And if a person wants to start the process of selling their business, how much time does it really usually take to get a company ready to be put on the market and sold?
Jan
Generally, if a business owner is truly interested in obtaining probably the best price for their business, it can take them anywhere from six months to a year to put together all of the financial information, put together a due diligence package that is really acceptable and can pass muster in, in terms of any sort of buyer or any sort of review by opposing counsel or opposing investors. It is not something that is to be taken lightly. It doesn’t happen overnight. It means cleaning up a lot of issues that probably have been let go simply because there wasn’t the time or the money, whatever the reason for not accomplishing something on behalf of the business, but generally in order to sell a business, you start a year before you actually want to accomplish the sale
Neil
Buying and selling a company usually falls under the topic of mergers and acquisitions. Two of the primary tools to accomplish this are a stock purchase or an asset at purchase. Can you help us understand the difference between a stock purchase and an asset purchase?
Jan
The primary difference between an asset and stock purchase is what it is that the buyer is purchasing. If the buyer is utilizing an asset purchase module, then essentially what they’re doing is they’re buying the assets of the entity. If they’re doing a stock, then they’re purchasing the actual equity, the stock certificate, or the, the membership certificate of the individual company. The distinction between the two has a great deal of ramification in terms of taxes. So for example, if you are selling an asset within an entity and that asset is utilized for opera, then the gain on that particular asset will likely be ordinary income as opposed to capital gains income. So we attorneys have a tendency to like asset sales, if you will, because it avoids some of the potential liabilities that may arise. You purchase the stock or the membership interest in an entity. But in fact, I think if a well written contract is utilized, a stock or membership purchase is generally far more effective and is more beneficial to the seller of the company because they will have long term capital gains as opposed to ordinary income and the tax rates between ordinary income and the capital gains rate can be significant.
Neil
You mentioned due diligence. What are some of the elements of what you would consider to be an, an effective process of due diligence?
Jan
Due diligence is really a review of virtually everything that the company has done in the past. It means a complete review of the corporate formation documents, the ongoing minutes, the of loans, the changes in ownership of the, to T review of contracts, review of HR issues, review of employment issues. And as you move into accounting, it’s a review of the financial statements and are they prepared in accordance to gap a review of the tax returns to ensure that the tax returns accurately reflect what it is the financial statements say? It is really a complete review of the business bottom to top in all three substantive areas of law, accounting and tax.
Neil
So, Jan, do you have any final thoughts on the subject of mergers and acquisitions?
Jan
Any company or individual that’s taking a look at a merger or acquisition really needs a comprehensive team. You need a team that has experience and expertise in law tax and accounting in order to ensure that you effectively complete a due diligence package that is worthy of submission to a potential buyer. And that means putting together a team for those particular areas that include the legal team and accounting team and a tax team.
Neil
And the same is true for the buyer. They need someone who can look at a transaction from all three of those perspectives as well.
Jan
Absolutely.
Neil
You mentioned contracts a few moments ago. Contracts are the essence of business. What types of contracts service do we provide?
Jan
We have full contracting services available in the firm. Generally contracts are either created by a firm or reviewed by a firm and we have the ability to do either. So it could be a contract for employment. It could be a memorandum of understanding. It could be a contract for sale of, of a business, any type of contract that either needs to be created or reviewed. We have a full legal team that has the ability to accomplish that goal.
Neil
Jan, I think many people are surprised to learn the contracts aren’t just covering aspects of the law.
Jan
That would be true in our world when we go back and we review, or we write at a contract, we are always cognizant of the tax and the accounting ramifications that a contract can go back and enforce simply by the way it’s written. So for an attorney that’s unfamiliar, for example, with accounting and or tax ramifications for certain types of contracts, the way a contract is written can go back and determine how a tax or accounting process is going to have to be executed. And it’s by knowing those types of processes and knowing how that processes can be implicated in the other substantive areas of accounting and tax, that it’s really critically important to review a contract in light of how it can go back and end up impacting other aspects of the business. So to make a quick example, if I’m writing a contract, for example, for a payment of something, and I want to go back and I put in terms into a contract, I can either accelerate the payment, which means revenue recognition will occur at one point, or I can de accelerate it. And that means revenue recognition could occur at a different point. So when you’re putting together a contract, it’s really critically important to understand the tax and accounting ramifications that can come about because of the way a contract is written.
Neil
Jan transactional planning is one of the central aspects of what we do. What are some of the legal issues associated with transactional planning?
Jan
Transactional planning is again, really an integrative process of legal tax and accounting. But in terms of just the legal analysis of a transactional plan, that can be the distinction of what type of entity may want to be created, who should own the entity, where it should be owned and what type of contract should be executed between the entity and or the shareholders members, or even outside vendors. It’s an integral part of the transactional that also needs to take into consideration the aspects of accounting and tax that will have to be integrative in order to come up with a successful transactional plan.
Neil
And another major area of legal services we provide is estate planning. What are some of the estate planning legal services we offer?
Jan
Estate planning is crucial in to terms of any type of planning for an individual or even a business. So we do estate planning. We create trusts, we can do probates, we can do probate controversy work. And primarily the issue that we talked about earlier in terms of business succession planning becomes crucial with estate planning because those two components are really integrative in terms of understanding how the loss of a, an owner or a business owner will be impacted in the event of death or disability, which is determined through the estate or trust planning, as well as the business succession planning
Neil
Estate planning for individuals and families also covers things like advanced healthcare directives, trusts, power of attorneys…
Jan
Very critical components of estate planning is the determination of who’s going to take care of you in the event of disability, which I think is often overlooked. Most estate plans presume that you’re dying, but oftentimes what’ll ends up happening is someone can become disabled. And if you’re disabled and you’re unable to take care of yourself, either from a financial or even a physical perspective, who is it that’s going to, to go back and be allowed to make those decisions for you instead of waiting for a court or a family member to step in, we feel it’s better to go back and create the estate or the trust to go back and determine through the creation of documents that will tell individuals who will be responsible in the event, that you are unable to represent yourself or physically take care of yourself.
Neil
In many cases, estate planning is about protecting and transferring wealth and assets from one generation to the next
Jan
Largely estate planning is what is it that’s going to happen to assets in the event of one’s death and how is it that we avoid probate or additional taxes to be implemented in terms of assets that have already been aggregated and taxed during one’s lifetime to the successors or the beneficiaries that one chooses to leave their assets to it’s a complicated process. It’s a process that needs to be planned and well thought out as well, a as memorialized through either a trust or a will.
Neil
And why is estate planning so important for those with blended families?
Jan
We often see blended families walk into our office and they have assets that have been earned through different lifetimes until the husband and the wife come together and they will have children from different previous spouses. And so the assets that they earn together then have to be split among not only children that they may or may not have together, but to children that are stepchildren to one spouse or the other. And oftentimes there is a disparity between the assets that one spouse brings in, in as opposed to another brings in, and the children of certain spouses or stepchildren of certain spouses may feel that the ownership of their parents’ assets should go to them solely as opposed to the stepchildren that have been brought into the family because of marriage. So in order to avoid a lot of family conflict, it’s good to plan put on paper, what it is that’s going to whom and why, and to think about it prior to someone becoming disabled or dying.
Neil
So in essence, Jan, why was it so important to integrate legal services into this firm?
Jan
The importance of legal services can’t be overstated because of essentially everything that we do, every decision that we make, whether in our individual lives or in our business lives is impacted by a law of some sort. So it was critically important to integrate legal services into our menu of services in order to provide the full scale substantive overview of accounting tax and law to come up with the best solutions for individuals and for businesses in terms of the issues that they face
Neil
And the problems they’re trying to solve.
Jan
Always
Neil
Thanks Jan
Jan
Learn more about our integrated legal tax, accounting and business solutions and visit Allenbarron.com or call (866) 631-3470 to schedule a free consultation.