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4 Important Steps to Protect Personal Wealth From Business Liabilities

Asset Protection, Business PlanningNo Comments

asset protection 150x150 4 Important Steps to Protect Personal Wealth From Business LiabilitiesEvery business owner makes the decision to assume some portion of risk when they operate their own business, but no one wants that potential risk to affect their personal wealth.  Unfortunately, there are all too many business owners who neglect to implement the correct asset protection strategies to firmly separate business risk from personal wealth.

There are a number of important steps business owners should take to make sure personal wealth is protected from business liabilities, including:

Choosing the right business entity.  Setting your business up as a corporation or limited liability company (LLC) will better protect you in case of a business lawsuit than if you establish your business as a sole proprietorship.

Keeping finances separate.  Business and personal finances must be kept totally separate and the correct business name (not your personal name) should be used on all business documents, including property titles, contracts, etc.

Complying with all rules and regulations.  Taking shortcuts can come back to bite a business owner if someone suing you can prove you have been negligent or have acted fraudulently.

Having the right insurance.  If you own your own business as well as the building that houses your company, you will need to have different insurance policies for both.  Having the right kind of business insurance makes your own personal wealth less of a target in case of a business lawsuit.

To learn more effective business protection strategies, contact our Costa Mesa law firm.

Taxes That Must Be Paid By The Self-Employed

Business Planning, Tax PlanningNo Comments

tax wallet empty 150x150 Taxes That Must Be Paid By The Self EmployedIf you are considered as self-employed by the IRS, you are responsible for paying self-employment taxes based on your earnings. The IRS defines self-employment as any business that does not file a business income tax return – including LLCs, sole proprietorships, partnerships and independent contractors.

The biggest tax burden for the self-employed is the self-employment tax. You are required to pay Social Security and Medicare taxes both as employee and employer. If you have over $400 in annual net earnings – which is the profit left over after business expenses are deducted – you’ll owe self-employment tax.

The earnings threshold for Social Security tax in 2013 was $113,700; any earnings over that limit are not subject to the Social Security portion of the self-employment tax. However, the Medicare tax portion still applies.

You may also be responsible for federal, state or local taxes, depending on the size and nature of your small business.

A business planning attorney can advise you on the laws surrounding self-employment taxes.  Contact our Costa Mesa law firm for help.

How to Ensure a Smooth Ownership Transition for Your Business

Business PlanningNo Comments

handshake business 150x150 How to Ensure a Smooth Ownership Transition for Your BusinessIn the excitement of launching a new business, it is easy to forget some very crucial considerations: what happens when a partner passes away or simply wants out?  A buy-sell agreement is a key part of ensuring a smooth ownership transition, whenever it may happen.

A buy-sell agreement does three key things:

  • It provides a way for shares to be valued when a partner retires or dies.
  • It ensures that the shares are sold to a buyer approved by the remaining partners.
  • It can address the procedure for selling the business outright.

You should think of a buy-sell agreement as a contract between the current and future owners of your business and as extra insurance that your legacy will continue after your death.

Be sure to plan ahead and consult with an experienced business planning attorney to write the buy-sell agreement long before you need it.  You will need to consider all possible scenarios for selling all or part of your business and draft an agreement that fits your unique needs.

It is easier to discuss and agree upon details when the sale of your business is an abstract concept rather than a looming necessity.  A proper buy-sell agreement should look at your situation individually and develop triggering points that go well beyond the obvious.

If you are building a business, be sure you are protecting it properly.  Contact our Newport Beach law firm for help.

Why Now Could Be a Good Time to Sell the Business

Business PlanningNo Comments

Yesterday’s Wall Street Journal noted that now may be a good time for business owners who may have struggled before to sell a business due to the weak economy to give it another go.

Data from online small business marketplace shows that 1,685 small businesses were sold during the third quarter of this year compared with 1,189 during the same time period last year – the third year-over-year quarterly increase in a row:

MK CH281 SBSELL NS 20131023174507 Why Now Could Be a Good Time to Sell the Business

Most of the sales have come from service companies, followed by retail and restaurants.  Small business lending is also on the rise, with the SBA backing $5.3 billion in loans during the third quarter of this year versus $4.3 billion in the third quarter last year.

According to the WSJ article, business valuations have risen with the improving economy, making what would have been a difficult sale just three years ago more attractive to investors now.  Banks and buyers typically look at the latest three years of revenue when assessing a deal.

Timing is critical, however; commercial lease rates are on the rise, which could hamper business sales for baby boomers looking to cash out and retire.

If you are looking for a business exit strategy that will help provide a good financial future for you and your family, contact our Newport Beach law firm.

Small Business Owners: How to Tell If You Are Ready to Retire

Business Planning, Retirement PlanningNo Comments

question mark in front of face 150x150 Small Business Owners: How to Tell If You Are Ready to RetireWhile a small business owner may already be mentally and emotionally ready to retire, how can you tell if you are financially ready?

Guaranteed source of income.  Are you already fully vested in your 401(k) or pension?  Have you reached the age when you can begin making withdrawals?  Before you can retire, you need to have a guaranteed source of income that is predictable.

Liquidity.  Do you have a ready source of cash to take care of all your expenses as soon as you retire?  If you need to sell stock or other assets to produce income for living expenses, you are probably not ready to retire.

Distribution strategy.  Do you have a retirement distribution strategy in place that will provide you with enough income every year to cover your bills?  If your retirement investments are still experiencing wide fluctuations, now is probably not the best time to retire.

Health insurance.  If you are planning to retire before the age of 65, are you able to afford health insurance until Medicare kicks in?

Contingency planning.  Have you done contingency planning so that some unforeseen circumstance like a major health problem doesn’t derail your retirement plan?  Some experts suggest doing a “best case” and “worst case” retirement budget to determine if you would be able to survive a large complication.

Gut check.  The longer you work, the better off you will be in retirement.  Working longer gives you more time to save and less time to spend.  However, if continuing to work is harming you emotionally or physically, the trade-off might not be worth it.

Of course, one of the critical elements small business owners needs to have in place prior to retirement is a business succession plan or exit strategy.  This is the best way to ensure your retirement years are indeed golden.

For more information on retirement planning for small business owners, contact our Orange County law firm.


Starting a Business? How to Choose the Right Ownership Structure

Business Formation, Business PlanningNo Comments

open sign Starting a Business?  How to Choose the Right Ownership StructureDeciding on the right structure for your business is an important step in starting that new business off on the right footing.

The proper structure – LLC, corporation, partnership or sole proprietorship – depends on what kind of products or services your business will provide, the ownership structure and the financial situation.  Here are some factors to consider when choosing a business ownership structure:

Complexity – if you are starting your business without a lot of capital and will be essentially operating on a shoestring in the beginning, you may wish to choose a simple structure, like a sole proprietorship or partnership.  Corporations and LLCs are more complex corporate structures and more expensive to maintain, requiring careful record keeping and certain operational formalities that may not be necessary if your business concept is a simple one.

Risk – if you are operating an inherently risky business – for example, trading stock or construction – you will probably want a structure that provides personal liability protection to shield your personal assets from business claims.  A limited liability company (LLC) or corporation provides this kind of protection.

Taxes – taxes on business profits for partnerships, LLCs and sole proprietorships are all reported the same way: on the personal income tax returns of their owners, who must pay income taxes on all net profits.  Corporations pay corporate taxes at special rates on any profit at year-end.

Investment Capital – having a corporate structure allows you to sell shares in your business to raise investment capital.

Contact our Orange County law firm for guidance in business planning and protection.

Estate Planning for the Self-Employed

Business Planning, Estate PlanningNo Comments

self employed e1368805842832 Estate Planning for the Self EmployedBeing your own boss brings with it a lot of responsibility – including the responsibility to create an estate plan so your heirs are not left with a lot of your business’s unfinished business.

If your business is a sole proprietorship, the assets of the business (and its obligations) are your personal assets and obligations, so you need to plan for how those are dispensed once you are gone.

Obviously, the basics should be in place:  a Will, a Living Will, Power of Attorney that appoints someone you trust to look after your affairs and Durable Power of Attorney for Healthcare to appoint someone you trust to look after you if you become incapacitated.

You should also consider establishing a trust to handle your business affairs after you die, even if you’ll only use it for closing the business down and dispensing the assets.

Establishing trusts that will protect what you’re working so hard to build right now for your surviving spouse, children and other beneficiaries is also something you should discuss with an estate planning lawyer.

If you’re starting a new business, you’re doing a lot of planning.  Just be sure you do some estate planning as well to protect it all.  Contact our Newport Beach law firm for help.


Business Succession Planning a Must to Assure the Future of the Family Business

Business PlanningNo Comments

plan a plan b 150x150 Business Succession Planning a Must to Assure the Future of the Family BusinessMost California small business owners spend a vast majority of their time concentrating on cash flow and the balance sheet – a focus that too often gives short shrift to thoughtful business succession planning.

Of course, if you want your business to die with you, no planning is needed.  But if you have partners or family members who plan to continue the business after you are gone, then business succession planning is a must.

If you have business partners, the standard way to transfer your ownership interest is through the purchase of life insurance.  Once the business has been valued, life insurance is procured for each partner that allows the remaining partners to purchase a deceased partner’s share of the business.

Insurance can be purchased in one of two ways:  through a cross-purchase agreement or an entity purchase agreement.  In a cross-purchase agreement, each partner purchases and owns a policy on each of the other partners.  This is usually done in small partnerships.  When one partner dies, the proceeds of his or her life insurance policy is paid out to the remaining partners, who use the proceeds to purchased the deceased partner’s shares in the business.

For larger partnerships (more than five partners), an entity purchase agreement may be the preferred vehicle.  In an entity purchase agreement, the business purchases a policy on each partner and becomes the owner and beneficiary of the policy.  Generally, the cost of these policies is deductible, and the business incurs all costs and underwrites the equity between partners.

For more information on business planning, contact our Orange County law firm.

How to Prepare for the Sale of Your Small Business

Asset Protection, Business PlanningNo Comments

business for sale e1346270869281 How to Prepare for the Sale of Your Small BusinessIf you’ve made the decision to sell your small business, there are a number of things you will need to do in addition to consulting with a business attorney to ensure the process goes smoothly:

Set a realistic price.  Coming up with a realistic price for your business will entail some research.  Look at what similar businesses in your industry have sold for, and check with your industry association to determine sales trends.  You will also need to estimate the worth of your business based on actual assets as well as any goodwill.

Consider taxes.  Be sure you understand the tax consequences to the sale of your business, which will be affected by the structure of your company (whether it’s a corporation, LLC, partnership or sole proprietorship) and whether you are selling the assets of the business, or the entire entity.

Get financials in shape.  You should consult with a tax attorney or accountant about recasting your tax returns to add back any discretionary expenses that prospective buyers may not spend – for example, if the company paid for your family’s medical insurance, or bonuses were given to family members.

Advertise.  Unless you have a buyer in mind, you will likely need to advertise the sale of your business in local newspapers, trade publications and on business sale websites.  If you are willing to part with a commission, a business broker may also be an option.

Negotiating the sale.  Whether you are selling all or part of your business, the guidance provided by an experienced business attorney can give you peace of mind that you are striking the best possible deal.

Developing a sales agreement.  This should include a list of the assets included in the sale as well as the value of the assets, any contracts or business relationships the new buyer will be assuming, and the structure of the sale, including how you will be paid.  Again, the counsel of a business attorney is highly recommended.

Closing preparation.  You will need to prepare a list of all the documents and other items like building keys and security codes that need to be turned over to the buyer at closing.

Filing the IRS paperwork.  After the sale, you and the new owner must file an Asset Acquisition Statement with the IRS and include it with your tax returns.

Your business is one of your most valuable assets.  For more information on protecting your assets, contact our Orange County law firm.



A Plan to Protect Real Estate and Business Assets

Asset Protection, Business PlanningNo Comments

Safe1 150x137 A Plan to Protect Real Estate and Business Assets Insights On How To Safeguard Your Legacy

An Equity Reduction Plan (ERP) is designed to protect business or real estate assets, and can be a highly effective form of asset protection for those who have significant real estate holdings or own their business or professional practice (doctors, attorneys, etc).

Within the structure of an ERP, a practice called “equity stripping” can be utilized to move the equity or value of an asset to a protected position while still retaining original ownership.  The advantages of this include:

  • Avoids transfer of real estate ownership and the attendant property and transfer taxes
  • Protection of multiple properties without the need to create separate LLCs
  • Protection of property equity from an inside liability claim
  • Protection of cash flow
  • Protection of assets used to run the business
  • Leverage of asset equity to generate business or investment income

When creating an ERP, it is important to accurately valuate the underlying assets and to keep that valuation current through a regular review process.  In the event of a claim or lawsuit, the ERP lien takes precedence over the claim of any creditor; any judgment proceeds go first to the ERP and only excess proceeds are made available to satisfy any judgment claim.

If you would like additional information on strategies to protect your personal and business assets, contact our law firm to schedule an appointment and free initial assessment of your Equity Reduction Plan (ERP).

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