3 Asset Protection Tips for 2013

As North Carolina business owners and other taxpayers adjust to the effects of the 2012 American Tax Payer Relief Act, they are starting to focus on asset protection strategies at the same time as minimizing taxes to the fullest extent possible.

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3 Tips For Succession Planning

Estate plans and trusts preserve assets accumulated over a lifetime and distribute them to beneficiaries, but what happens to a business when the owner or key executive departs to another company, becomes ill, or passes away? Succession plans create the selection process for the future architecture of an organization by appointing certain individuals to take over positions in the event an executive leaves their role. Succession plans are to businesses as prenuptial agreements are to marriages.

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NC Dept. of Revenue issues Directive on $50k Business Income Deduction

North Carolina has a new law, G.S. 105-134.6(b)(22),  that grants business owners a deduction of up to $50,000 of their net business income from NC taxable income.  The income must be reported on Form 1040 Schedules C, E or F, and no deduction for passive income is allowed.  The North Carolina Department of Revenue just issued a Directive that answers FAQs on the new law.

Unfortunately folks like me who own small businesses that are incorporated cannot benefit from the deduction.  However, those who own 100% of a business and want the protection that a separate legal entity provides can establish a limited liability company (LLC).  A single member LLC is disregarded for tax purposes by the IRS, so the income is reported on the owner's Schedule C.  At a tax rate of seven percent, the savings could equal $3,500 per year.

Company Buy-Sell Agreements - Plan Ahead

One estate planning tool that can protect your family and partners is a buy-sell agreement. This legal document gives owners the first chance to buy an interest in the company if another owner pulls out or dies. Ideally, these contracts are drawn up when a business is launched, but they can be entered into later.

But don't wait too long. If you die without an agreement, it may be difficult for your heirs to know how to handle important matters that could have a significant effect on the value, continuation or disposition of your business. Even if you stay with the company for decades, the time to prevent disputes is before they occur. Minimize legal fees, as well as sleepless nights, by solving "what if" issues now.

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Single Member LLC Outside Creditor Protection Eroding

In last week's Olmstead v. FTC decision, the Florida Supreme Court ruled that single member limited liability companies (LLCs ) do not provide protection from "outside" creditors. This has been a concern of mine since a similar bankruptcy court ruling in Colorado in 2003, and I have advised clients that North Carolina LLCs could face similar attack.

LLCs are great entities for providing asset protection for their owners against "inside" creditors, such as a tenant injured on real property owned by the LLC.  Multi-member LLCs also protect a member's interest from outside creditors such as the holders of unrelated judgments.  This Facebook post from Florida attorney Ed Arista offers a nice synopsis of LLCs and asset protection.

LLCs Provide Favorable Tax Treatment and Liability Protection

From TrustCounsel's today's eNewsletter:

There's no one legal structure that works best for all businesses. The most favorable choice depends on a number of factors, including the number of owners, your tax situation and whether or not you have employees. A limited liability company (LLC) may be a good choice because it provides flexibility, low maintenance, favorable tax treatment and most importantly, limited liability protection to keep your personal assets safe.

Dodging a Double Tax Hit

    An LLC can help avoid double taxation if you sell the company or some of its assets. Let's say your company buys a warehouse and later makes a profit selling it.
    As a C corporation: You're liable for a combined federal and state tax bite of as much as 40 percent. Now you can take the gain left over after paying corporate level taxes as salary or a dividend distribution. 
    If you take the money as a dividend, your company loses a deduction and you pay personal taxes on the cash.  Add your personal tax bill to the corporation tax bill to find out how much was paid in combined taxes. If you take the money as salary, your company keeps its deduction, but now payroll taxes kick in.
    As an LLC: You are taxed only on your personal return and at low capital gains rates.
A properly-organized LLC combines some of the aspects of partnerships and corporations into one entity. For example, partnerships and sole proprietorships generally have no insulation from liability. But by statute, a member of an LLC has limited liability and no personal responsibility for the debts or liabilities of the entity or the other members.

LLCs can work well for family businesses that have exposure to product or other liabilities, real estate enterprises, and service companies.

Discuss the specific benefits of various business structures with your attorney, keeping in mind that the laws regulating LLCs vary from state to state. Here is a list of general LLC issues to consider:

 

 

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