The Business Life Cycle
The Business Life Cycle means starting, then running a business, and finally implementing an exit strategy whether by sale, liquidation or passing the business to a family member or employee. Each step should involve the input from a legal professional.
The first stage of any business is obviously establishment. Creating a proper foundation at this stage can avoid expensive taxation issues later. Thus, good business planning is a crucial and necessary first step. When starting a business, the first issue that should be addressed is the choice of entity.
During the operational life of a business, a variety of circumstances may require legal input. Such as buying and selling specialized assets, ongoing reporting, board meetings procedures, and transactions if somebody wants to buy a part or all of your business.
Finally, what happens when at the end of the business lifecycle? It may be your opportunity to cash out on all the effort and years of hard work, or to keep the business going by passing it to family members or employees. It also can mean shutting down the business. Planning for your exit strategy should include a knowledgeable Arizona attorney.
Asset Purchases, Mergers, Acquisitions & Business Separations
Every business changes over time. Some remain small, operated by the original proprietor. Others commence or grow into partnerships or other joint ventures with other people or companies.
Some are acquired by larger businesses and become part of a larger business structure. Occasionally, business owners determine that operations, partners, or subsidiaries that were once compatible can no longer coexist and the parties must separate operations.
The process of combining and dividing businesses can be complex. Tax and liability issues take a prominent role in driving how one structures such transactions. Documents that will govern new relationships must clearly reflect the intentions of the parties. Negotiating and clarifying issues in the beginning of a relationship or transaction can avoid costly litigation later on. In addition, the federal and state governments often regulate business mergers, acquisitions and separations.
The role of a qualified attorney in connection with such transactions is to identify key issues and questions relating to the relationship of the parties, the legal and tax consequences associated with alternative transaction structures, and to draft documents that clearly reflect the intent of the parties and protect them from unplanned consequences.
Businesses often need to purchase specialty assets such as real estate, equipment, aircraft, etc. A qualified attorney can help with issues related to these transactions including income and sales tax issues, multi-state regulation, form of ownership, joint ownership agreements and acquisition agreements.
Compensation Plans and Methods
Qualified Retirement Plans
A Qualified retirement plan is one that meets the requirements of Internal Revenue Code Section 401(a) and the Employee Retirement Income Security Act of 1974 (ERISA) and is thus eligible for favorable tax treatment.
These plans offer several tax benefits: they allow employers to deduct annual allowable contributions for each participant in the year the contributions are made, but taxes on those contributions (and earnings on those contributions) are deferred until withdrawn for each participant; usually years after the initial contribution.
Qualified retirement plans are highly regulated and have, over the years, been the subject of significant additional legislation and litigation. Plans must limit contributions, benefits, relative benefits between highly and non-highly compensated employees, the timing of distributions, and many other plan characteristics.
Failing to properly draft and operate such a plan can result in substantial income and excise tax liabilities to employees and employers, and expose employers to claims for benefits and breaches of fiduciary duty.
Employers need assistance in implementing, operating and, where appropriate, terminating such plans. Residual liability resulting from such plans, even after termination, can be substantial.
Executive Compensation Plans and Deferred Compensation
Frequently, companies determine that certain key executives and other management employees should be compensated beyond base salary, normal bonuses and qualified retirement plan contributions.
Sometimes, that kind of compensation can encourage management employees to continue with an employer for an extended period of time. Stock option plans, stock bonus plans, phantom stock plans, split dollar life insurance plans, deferred compensation plans coupled with Rabbi trusts, are all examples of techniques that have been popular tools in addressing these issues.
To accomplish that objective and still postpone the income tax consequences to those employees is a complex task. The solutions are found in rules, regulations and decisions concerning tax and fiduciary laws. In addition, new laws enacted in recent years have seriously limited everyone’s ability to defer income.
Employee Compensation and Bonus Programs
Bonus programs reflect a company’s definition of success, how that definition is measured, and the extent to which that measure is met. Bonuses are similar from company to company.
The reason is that most companies subscribe to a pay-for-performance philosophy whereby bonuses are tied to two important measures: how well you are doing with respect to your manager’s expectations; and how well your company is doing with respect to its expectations.
Individual and group performance goals are hard to set, because they should be neither too ambitious nor too easy to achieve. It is best for employees to set next year’s performance goals once current year results are known. However, the manager should resist the temptation to base an employee’s performance goals on an outstanding year.
When that happens, both employee and manager can become disappointed. In these instances, managers often give their employees discretionary bonuses at the end of the year to make up for the loss of performance-based bonuses.
Managers also give out discretionary bonuses – bonuses that are not tied to a formal performance target – when it is too difficult to establish formal performance goals.
Depending on the bonus program and your level within the organization, your bonus may be determined not only by your own performance, but also by the performance of your team or work group.
Ownership by Employees
Employers sometime determine that it is appropriate to allow key employees to participate in the ownership of a company. In addition, employees or partners often become members of, or shareholders in, companies as a result of services they perform or intend to perform, rather than on the basis of capital that they contribute.
The issues associated with these types of arrangements are primarily income tax related and can be complex to solve. Often solutions involve some sort of deferred compensation plan or program.
No company or business owner should engage in discussions or promises to employees or potential partners or other owners without the advice of a qualified attorney to assist in structuring appropriate plans and programs.
Employers who adopt benefit plans for their employees frequently assume the role as the primary fiduciary for those plans. The must make manage plan operations, interpretation of plan provisions, benefits distribution, and plan investment.
Those can be weighty decisions that affect the lives of employees for the long-term, and can have important regulatory implications. Bad decisions or failures to comply with applicable rules can result in liability for resulting losses, taxes and penalties and expensive litigation.
ERISA Reporting & Compliance
Qualified retirement plans and other plans designed to defer employee compensation or to provide health and welfare benefits are governed by the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).
ERISA contains complex rules related to the reporting and disclosure requirements that employers must satisfy with respect to plans they maintain. Employers also must provide summary plan descriptions and other documents to employees who participate in the plans.
Under the Occupational Safety and Health Act of 1970, employers are required to provide a workplace that is free of dangers that could physically harm employees. O
SHA does so by enforcing the standards developed under the Act; by assisting and encouraging the States in their efforts to assure safe and healthful working conditions; by providing research, information, education, and training in the field of occupational safety and health.
Oftentimes, these workplace hazards only become evident after an injury has occurred. For Example, an unguarded machine part that spins at a high speed may not seen dangerous until someone’s clothing gets caught in it.
A knowledgeable attorney can assist you in your commitment to establishing up-to-date workplace safety and health regulations based on strong science, emphasizing fair enforcement of standards, and making prevention a priority.
Let us provide you with an OSHA Safety and Compliance Review to prevent workplace injuries and other accidents. Keep in mind that only one OSHA complaint can affect your business with future safety issues.
Workplace immigration compliance in the U.S.A. began in 1986 when Congress passed the Immigration Reform and Control Act (“IRCA”). With the passage of IRCA employers became responsible to verify the employment eligibility for their employees hired after November 6, 1986. This requirement was implemented through the completion of the I-9 employment eligibility verification form.
Correct and timely completion of the I 9 employment form is absolutely central to the compliance process. Employees must complete their section of the I-9 employment form (which is section 1) by their 1st day on the job, while employers have up to the 3rd day.
As part of the process to complete the I-9 Employment eligibility verification, the employee must provide certain documents to verify their identity, and also to show that they are authorized to work in the US.
Employee Policy Manuals
Employment manuals can be extremely helpful for businesses because they outline employee rights and responsibilities, and also describe to employees what they can expect of their employers.
Employment manuals can be as comprehensive as employers make them, and they commonly contain company policies, procedures and expectations. Businesses do need to be careful when creating an employment manual because they can be construed as a contract, and become legally binding on the employer.
For this reason, businesses should always rely on legal counsel when creating an employment manual. If properly drafted, establishing an employment manual carries minimal risks, and provides the overriding benefit of clearly outlining the employer’s expectations.
Overtime regulations are among the most misunderstood of all federal regulations. Employers often subject themselves to significant liability and legal expense by failing to understand and follow them.
Even when an employer is seeking to benefit its employees, a failure to follow prescribed rules can result in tens of thousands of dollars in penalties and back pay. Employers must calculate overtime based on weekly work of non-exempt employees.
They must maintain appropriate records and must be prepared to respond to a government inquiry regarding those records. In order to do all of that, an employer must identify which employees are exempt from overtime requirements and which are not.
If the working of overtime is limited or prohibited, those limitations or prohibitions must be enforced. Early assistance from a qualified attorney can save literally thousands of dollars in legal expenses and penalties once a problem is discovered.
Charitable Organization Tax Planning
Individuals, companies and civic groups often are interested in forming tax-exempt organizations. Those organizations may be formed to promote charitable work, they may be formed to include family members in promoting an important charitable cause supported by their parent or benefactor.
They may be formed by groups of business owners for promoting business growth or public service objectives. Section 501 of the Internal Revenue Code provides a variety of exemptions available to different kinds of organizations.
Each type of tax exemption brings with it different requirements. In order to qualify for a tax exempt status, one has to first establish a valid entity under state law and then request and qualify for an exemption from the Internal Revenue Service. The exemption will be granted based on how well the entity meets the requirements of applicable treasury regulations.
That application is typically accomplished on a specified tax form. For example, a public charity that would be exempt under Internal Revenue Code Section 501(c)(3) would be submitted on a form 1023.
The forms typically will require a business to demonstrate that it is organized (through its corporate documents) and operated (through detailed explanations of its advertising, payroll practices, anticipated activities, publicity, and revenue sources) for charitable, educational, scientific purposes, or to relieve the burdens of government. Other exemptions would have different but similar requirements and application forms.
Once granted an exemption, an entity must be operated in accordance with the exemption. The application and the exemption granted in response to the application form the standard against which the entity’s performance will be judged.
An entity that desires to substantially change those operations must seek additional approval from the IRS. Sometimes, tax-exempt entities merge or sell their assets to others and those transactions have all of the usual complexities that go with business transaction. Additionally, there are concerns with issues that are unique to tax-exempt organizations and an experienced attorney can assist you with such issues.
Transaction Privilege & Tax Use
The Arizona transaction privilege tax is commonly referred to as a sales tax. Yet, the tax is on the privilege of doing business in Arizona and is not a true sales tax. Although the transaction privilege tax is usually passed on to the consumer, it is actually a tax on the vendor.
Arizona transaction privilege taxes are imposed on persons engaged in certain business classifications, including retail sales. What this means is that various business activities are subject to state, county and/or city transaction privilege tax.
Types of business activities subject to the transaction privilege tax include, but are not limited to: retail sales, restaurants/bars, hotel/motel, commercial leasing, advertising, amusements, personal property rentals, real property rentals, construction contracting, owner/builders, manufactured building, severance (mining, timbering), transportation, printing, publishing, utilities, communications, air/railroad, private cars/pipelines and use tax.
Taxation: Estate, Income & Property
Estate Tax & Succession Planning
Financial and legal problems can surround all of life’s certainties and uncertainties. You can protect yourself and your family from these problems by having various types of legal documents and insurance in place. In deciding which types of insurance and legal documents are appropriate for your circumstances you should rely on an estate planning attorney to evaluate your financial and legal affairs.
Please visit our Arizona Estate Planning website.
There are numerous opportunities for minimizing the amount of income tax you pay. However, many tax saving opportunities can only be made use of by carefully planning in advance. Income tax planning applies to all kinds of income, including salary and income from house property, capital gains or interest.
If you are unsatisfied with the Assessor’s appeal decision, it can be appealed to the County Board of Equalization but it must be filed within twenty-five days after the mailing of the Assessor’s appeal decision. If no County Board of Equalization has been organized, you can appeal directly to the State Board of Equalization within twenty-five days of the Assessor’s appeal decision.
Lastly, a taxpayer who filed an appeal with the County Assessor may file a further appeal with the Tax Court within 60 days of the latest decision by the County Assessor. Direct appeals to the Tax Court must be filed on or before December 15th of the year of assessment. Court appeals from State Board of Equalization decisions must be filed within 60 days after the decision.
Call JacksonWhite at (480) 464-1111 to discuss your case today.
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