If you find yourself many years behind on filing your tax returns, you are not alone.  However, do not take comfort because not filing tax returns is a criminal act.  The IRS can prosecute nonfilers when the taxpayer fits certain criteria.  Further, if you have not filed an income tax return, then those unfiled tax years remain open for tax assessment until the tax return is filed.  Therefore, the IRS can come after you for not filing a tax return decades after it was due.  Locating a tax attorney to represent you with your unfiled tax returns is the first step both toward minimizing the taxes you need to pay and toward ensuring you are not one of the unlucky taxpayers the IRS criminally prosecutes.

Because this is potentially a criminal matter, a responsible accountant may direct you to a tax attorney.  Even if the majority of the work you need will be the preparation of your tax returns, accountants do not have an equivalent to the attorney-client privilege, and, therefore, accountants cannot withhold incriminating information you may provide him.  If you instead hire an attorney, the attorney may hire an accountant to prepare your returns, but, since requested by the attorney, the work of both the attorney and the subcontracted accountant could be protected as part of the lawyer’s “attorney work-product”.

If the IRS contacts you about your having failed to file a tax return, your first notice will likely be in the form of a letter requesting that you immediately file at least one of the returns due.  If you do not comply with the request, the IRS will often use the information available to them through third-party reporting, W2′s and 1099′s, to prepare a return on your behalf.  The IRS; however, will make no effort to ensure the various deductions and exemptions to which you are entitled are included.  Therefore, your tax bill, penalties, and interest could be substantially higher than if you addressed the issue and seek the assistance of a tax professional.

The Internal Revenue Service provides procedures a taxpayer must follow in order to be eligible for the benefit of its voluntary disclosure policies, and a trained tax professional will be the best line of defense between you and the IRS.

Of course, do not forget the State of Maryland will also be notified if you file your federal return, but not your Maryland return. In order to be eligible to receive a refund from the state, you would also need to file the Maryland return. If money is owed to either the IRS or to the Maryland Comptroller, then an installment plan can be worked out based upon you ability to pay. A little known fact is that, in addition to the tax settlement / offer in compromise option, you may be able to use bankruptcy to avoid paying the debt after certain criteria are met, essentially, the sooner you file the sooner bankruptcy becomes an option.

For further information on filing you past due tax returns, contact Jeff Rogyom at (410) 929-4578.  Please review the Disclaimer page regarding use of this website and its information.

Small business owners often feel they have sufficient time to begin making the transition and will delay the necessary steps until some fateful event forces them into acting. This leaves little or no time to prepare the business and the family for the burdens, both financial and managerial, that can be caused by a sudden and unplanned transfer.

If you are currently the owner of a business there will be several questions you will want to consider for your planning:

• Would your family be better off by selling the business or remaining owners?
• Will one or more members of the family desire and be capable of managing the business?
• Do you plan to retire and/or intend for the business to fund your retirement?
• What financial, legal and tax issues do you anticipate?

Once you and your advisor have considered each of these questions, you should be able to take the initial steps necessary to transfer your business.

Family Considerations.

Some family-owned businesses cannot be managed by a “hands-off” board of directors and needs one highly-involved person alone at its helm. You will want to consider which members of your family would both desire and be capable of being the manager of the business. In most situations there will be one obvious choice, but do not assume your other children will not either want some control or want to be compensated for their portion of the business. Discussing your plan with your family can be a delicate matter, but you may be able to avoid future conflicts at less opportune times. Some family members will want nothing to do with either earning a salary from the business or being an owner of the business. In addition, it is often the case where a small business produces only enough income to support one owner. Thus, planning to leave the business to one arranging either for compensation or extra bequests to the others can be a practical and necessary step to preserve the business and family unity. If comparable assets are not available to offset a gift to one child, then the business owner will often purchase life insurance that will benefit the other siblings.

Transfer of Management.

Once you have determined who or who will not be continuing in the business, you should begin preparing them for their future duties. Most prepare the next generation for their role through their active participation in the business. Through this experience they will become familiar with your business, your contacts, your industry, and the day-to-day tasks that the job entails. Further, there should be an opportunity for the employees and the successor to become familiar with each other. If that prospect seems frightening, then consider sending them to work at a similar business where they will be able to mature and fine-tune their business skills.

Transferring the Business.

Determining the method by which the business should be transferred will depend significantly upon the parties’ ability to fund the transfer, the owner’s need for cash, and the legal and tax consequences of the transfer. The factor most likely to affect the transfer is the funding of the transfer. If the business has significant value, then it may be difficult for the child to purchase the business outright and compensate their parents or siblings. If the business is not to be transferred until death, then life insurance can be used to compensate those children who will not be continuing in the business.

If you, as the owner, are not interested in being paid by your children or if the business has little value apart from the people providing labor, then you may be able to simply start gifting interests in the business to your children. Gifting can utilize the annual gift tax exclusion (currently $13,000 to each recipient) to transfer a portion of the business each year, usually based upon the appraised value of the business. To accomplish this annual gifting you will need to assign shares or membership interests each year. And, yes, you will need to go through that formality to have the IRS consider it having been done properly. An additional benefit of annual gifting is that it can be used to reduce your Maryland estate taxes as well. Alternatively, the owner can use their last will and testament or a trust to transfer your business to your children, but you should certainly contact your attorney to see what will be the best method.

If you will be transferring the business and expect some compensation, then you will be able to structure the transfer using similar methods used between unrelated parties. Your ownership interests in the business can be transferred in accordance with a buy-sell agreement whereby your child can purchase interests in the business from your estate. To assist the child with their purchase of the business, you or the child could purchase the child a life insurance policy payable on your death. The proceeds of the insurance policy can be used to purchase the interests from your spouse and provide money for their future use.

Tax Planning.

A transfer of a business can involve both income taxes, local transfer taxes, as well as both federal and state estate and gift taxes. Despite the federal estate tax having been raised, here in Maryland, you begin to have state death tax issues once your estate reaches $1,000,000, if transferring to your children. If you are transferring property at your death to someone other than your children, then Maryland death taxes begin with the first dollar transferred; no matter what your total wealth may be. Your tax attorney can assist you with transferring the business in the most tax efficient manner.

If the transfer is structured as a sale, then you should be aware of the income tax consequences. Most assume that the sale of a business always creates capital gains income. This is not always the case, and those items taxed at ordinary income tax rates can create a very large tax bill. One ordinary income item is the taxation of “recapture” income. When a business owner sells property that he earlier depreciated, if the amount realized from the sale is more than the adjusted basis (roughly, what’s left to be depreciated) then the property owner is considered to have recapture income. Essentially, it means you overshot the true depreciation of the asset and the IRS wants its money back, despite the fact you were likely using an IRS-required depreciation formula to calculate it.

Planning for Legal Issues of Your Family.

In addition to the obvious tax and legal issues associated with the transfer of a business, the personal and legal issues of you and your family can complicate matters. These issues usually must be considered when structuring the transfer or the consequences can be dire. For instance, you or your children could possibly have debt or spending issues, and transferring the interests to them could suddenly make your business subject to the claims of your child’s creditors. Another possible issue could be your child’s current or future marital status. While gifts and inheritances left to children generally will not be considered marital or community property in most states, the way you structure the transfer of the business to your child or your child having access to income from the business could cause property division and support issues if your child’s marriage takes a turn for the worse.

If your child has potential legal issues that could jeopardize their holding and benefiting from a transferred business interest, you may want to consider some other arrangement. For instance, you may may want to delay giving the business to your child until a later date when your child (or their marriage) matures. Rather than giving an interest in a business directly to your child, you can have the stock held in a trust for the benefit of the child. The trustee can distribute income from the business to the child, but, since the child will not own the stock, it may limit the risk of claims of creditors or divorce attorneys. Once the foreseeable legal issues have passed, you may then have the trust distribute the stock to the child, or even to a grandchild.

Conclusion.

Successful succession planning improves the odds that a business will survive into a second generation. We have all seen the consequences of when a child is thrown into the position of being an owner and manager of a business without proper preparation. While the child may be grateful for the opportunity to step into a business, only through proper planning will this gift be a blessing and not a burden.

For additional information or to discuss transferring a business, please contact Jeff Rogyom at (410) 929-4578. Please review the Disclaimer page regarding use of this website and its information.

A contract with a professional appearance lends credibility to your business.  You should not be surprised that your potential client’s likely have read hundreds of contracts themselves or that they use attorneys to review contracts for them.  Shoddy contract drafting can be very evident to even unsophisticated customers.  Presenting an error-filled unprofessional contract is hardly the best way to begin a new business relationship.  Further, if your counterpart’s attorney spots any holes in your self-created contract, he is under no obligation to point out those errors to you.  Hence, your contracts may be binding upon you and your business, but may not be binding upon the other party if, for instance, they decide to simply walk away half-way through the contract.

While legal writing may sometimes be difficult to read, the attorney is often using language with very specific meanings in court.  The “simplification” of legal contract language has landed many people in long court battles where the parties try to convince the court of a word’s meaning.  Let your attorneys draft the contract in legal language that other attorneys and judges readily understand so they do not feel the urge to let a court contrive the contract’s meaning.

If the attorney will only be reviewing the contract, he should be able to spot those seemingly harmless provisions that may have tremendous consequences.  For instance, contract language may choose the laws of a particular state to apply or the court jurisdiction where claims for breaching the contract would need to be filed.  Not only could you be forced into using the laws of a state that may be unfavorable to your position, but you could also be forced to file in an unfriendly court but it may be geographically inconvenient as well.  Hiring an attorney to review your contracts will allow you to know whether seemingly harmless provisions are potential pitfalls.

The most dangerous provisions in the contract will usually be its liability clauses.  Let’s say you have an electrical installation company and will be installing a $2,000 electrical panel.  If the contract you agree to makes you liable for any damages that may or may not be directly related to your installation, your company could be bankrupt if the panel fails and damages an expensive piece of equipment or shuts down the business for a few weeks. Obviously, the potential liability far exceeds any income you could ever earn from your contract.  Your contracts’ liability clauses should reflect that you cannot necessarily control the quality of the products you install and should limit your potential liability from indirect damages, such as business loss.  Your attorney will hopefully recognize and steer you away from such landmines.

Other common contract issues can be found in the remedies allowed under the contract in case the other party breaches the contract.  For instance, it is not uncommon for business contracts to require one party to continue providing services even if the relationship between the parties has substantially deteriorated, sometimes even when payments for the services have stopped altogether.  Very few businesses can survive for long under such circumstances.

Do not assume your small business cannot negotiate with larger corporations on contract matters.  Often those corporations’ legal departments draft contracts that stretch the limit in their favor.  They realize that many of these provisions may be overkill and can be cut without affecting the overall effectiveness or enforceability of their contract.  No matter how large the company, you may be able to negotiate away most overly burdensome contract provisions.

While time is always a concern in business, any commercial contract that can affect the bottom-line deserves a call to an attorney experienced in contract review.

For additional information or to discuss your company’s business contracts, please contact Jeff Rogyom at (410) 929-4578.  Please review the Disclaimer page regarding use of this website and its information.

Tax attorneys likely have knowledge of the IRS standards used when approving an installment agreement or an offer-in-compromise and, further, may know a taxpayer’s likelihood of success with either option.  In addition, they may know the best way to utilize the IRS statutes of limitations for collection and whether it too can benefit the taxpayer.  Of course, a tax attorney whose law firm also offers bankruptcy services may know those situations when bankruptcy is a more effective solution, and, conversely, not offering bankruptcy services likely eliminates from suggestion most of those nationwide offer-in-compromise mills we all know.

To determine whether taxes will be dischargeable through bankruptcy, your tax attorney will look at the age of the taxes due, the type of tax due, when and if tax returns had been filed, and whether their are any special circumstances, such as fraud which could prevent discharge.

While there are many exceptions, there are three general rules in determining whether an income tax debt can be discharged through bankruptcy.  To be discharged in bankruptcy:

1. the tax must be for a tax year for which the tax return was due (including extensions, if taken) more than three years prior to the filing of the bankruptcy petition;
2. the tax returns must have been filed more than two years before filing the bankruptcy petition; and
3. the tax must have been “assessed” more than 240 days prior to filing the bankruptcy petition.

In addition to the above general rules, additional rules can extend the statutory periods so the tax debt may not be dischargeable until a later time.  If you intend to file for bankruptcy and have tax debts, then you should certainly discuss with your attorney whether those debts can be currently discharged and determine whether delaying the bankruptcy filing to discharge the tax debt would be in your best interests.

Under some circumstances certain tax debts may never be discharged in bankruptcy.  Some tax debts relating to employee withholding, as well tax debts resulting from fraud or tax evasion, can never be discharged regardless of the passing of time.  Further, while the tax debt may be wiped clean by the bankruptcy, tax liens the IRS filed prior to the bankruptcy will likely survive the bankruptcy.  Therefore, if the IRS has a lien on your home and you sell the home a month after filing for bankruptcy, then, while the underlying tax debt may be gone, the tax may still be collected from the proceeds of the sale via the IRS’s lien on the home.  The lien remains in place until the IRS collection statute of limitations expires, which generally will be 10 years from the date the tax was assessed.

If your primary debts are tax related, then your lawyer should assist you in determining whether your best option is to just file bankruptcy or to utilize one of the IRS relief programs.  If your income or assets, for instance, make the success of an offer-in-compromise unlikely or make the payments under an installment agreement too high, then differences in the ways such income or assets may be calculated under bankruptcy laws may make bankruptcy a better choice.  Conversely, bankruptcy is certainly not always going to be the best choice and, for some people, bankruptcy may not even be available.  Your attorney should be able to advise you as to whether an offer-in-compromise, an installment agreement, bankruptcy or simply the passing of time may be your best option to resolve your tax debts.

Because of the complications in determining whether bankruptcy is an option for discharging your tax debts, you should certainly seek the advice of an attorney that has experience in tax matters.  Unfortunately, because of the ongoing issues with the economy, many attorneys have switched their primary practices to bankruptcy, and many may not understand the ins and outs of bankruptcy rules as they relate to taxes, much less the non-bankruptcy options available.

While there may be a stigma to filing bankruptcy, those with tax debts have often been forced into relying upon bankruptcy because of the IRS and its collection practices.  Using a bankruptcy filing is often the quickest and surest way of solving some tax issues, and bankruptcy should not be forgotten as a possible solution.

For additional information or to discuss your tax debts or possible bankruptcy, please contact Jeff Rogyom at (410) 929-4578.  Please review the Disclaimer page regarding use of this website and its information.

Simplifying the structure to meet your company’s current needs can generate direct cost savings.  It may also allow the company to eliminate levels of bureaucracy that can distract the company’s officers from their primary responsibility, increasing the company’s revenue.

Whether by design or accident, an improper corporate legal structure can cause the corporate functions to become more bureaucratic, which, in turn, can lead to unnecessary expenses, employee dissatisfaction, complacency, and other common issues encountered in bureaucracies.  In addition, a complex legal structure can create inefficiencies in data management and financial and tax reporting.  If your company has such issues because of its legal structure, a reorganization by consolidating and dissolving unnecessary entities can quickly produce real cost savings.

Even if you manage to keep bureaucratic issues at a minimum, you cannot escape the legally-required tax reporting requirements that federal, state, and local governments may impose upon multiple entities.  This can affect your company’s income, property, and payroll tax efficiencies both in its compliance burdens and its overall tax payments.

In the worst case scenario, a company without legal guidance over time may actually increase its tax liabilities by improperly using the entities.  By not knowing the function or tax treatment of each entity, a manager could, for instance, easily use an improper entity for purchasing a property.  You should have your company’s legal structure regularly reviewed to ensure it is producing the lowest possible effective tax rate.

A company with an overly complex structure will have increased legal costs.  There are direct costs associated with a company having unnecessary entities, such as additional resident agent and filing costs.  But there are also indirect legal costs, such as inter-company transaction agreements, licensing agreements, and unnecessary inter-company documentation costs.  Further, the company may lose some of its bargaining power with third-parties, and may unknowingly be negotiating deals as weak individual divisions.  Some third-party contractors may not even realize the size of your business, given many company’s data systems separately log purchases by different entities.

In determining whether your company’s legal structure is too complex, you should involve the key members of your company and its tax and legal advisers.  Untrained tax staff alone may not know the legal ramifications of dissolving or merging entities, so your legal advisers certainly should be involved.  Conversely, an attorney without business or tax training may not understand the effects of changing a company’s structure.

Any company that has entered or left a line of business, bought or sold properties, or underwent a corporate merger or acquisition could very well have lingering legal entity appendages that drain the company’s cash and resources.  Reducing corporate legal complexity to meet current needs provides both foreseeable and unexpected cost benefits to proactive businesses.

For further information, please contact Jeff Rogyom at (410) 929-4578.  Please review the Disclaimer page regarding use of this website and its information.

Beside the practical business and tax benefits, a buy-sell agreement also allows the parties to plan in advance of the moment when the ownership change will eventually occur, and, thus, allows the parties to avoid much of the tension and emotion that can result from delaying such discussions.  In addition, the buy-sell agreement also forces the parties to consider financial issues that often can only be solved if addressed well in advance, such as whether the company should purchase life insurance to fund the transfer.

The buy-sell agreement is a legal contract that dictates how, when, and for how much a company or remaining owners will be required to pay to acquire the interests of a departing owner.  The buy-sell agreement will typically provide for various triggering events that will either gives one party the obligation or the option to buyout the interests of another.  Typical events include: death, disability, divorce, bankruptcy, retirement, or otherwise changing their role in the company.  Many owners will be concerned about the ownership rights and control of the company.  Other owners will want to ensure payment for the departing owner, and still other owners will want the buy-sell agreement to minimize the tax burdens of the company and the departing and remaining owners.  Thankfully, buy-sell agreements are not one-size-fits-all, and an attorney will be able to address many, if not all, of these concerns.

While an attorney is virtually unlimited in choices that can be made in drafting and implementing the buy-sell agreement, there are primarily two types of agreements: the redemption agreement and the cross-purchase agreement.  Of course, even this choice can provide alternatives, such as a mixed agreement that allows members or shareholders the option to purchase the interests of the departing owner before requiring the company itself to purchase the owner’s interests.

Redemption Agreements

A redemption agreement will cause the entity to purchase the interest of the departing owner.  Many favor using the redemption agreement for buy-sells because of its simplicity, particularly when there are numerous owners.  If life insurance is needed to fund the purchase, a redemption agreement will typically require the purchase of only one policy.  And, since the company purchases the interests of the departing owner, no particular owner will have their interests increased in relation to the other remaining owners.  Of course, if one remaining owner already controls a substantial position of the company, then this could push that owner over a threshold such as the 50% ownership mark or other critical amount designated in the company’s bylaws or operating agreement.

While a redemption agreement has its advantages, it does have its limitations as well.  The redemption agreement will cause the entity to purchase the interests of the departing owner.  Thus, while the value of the remaining owners’ interests will increase in value, the shareholders of a c-corporation will see no increase in their tax basis.  So, when those shareholders sell their interests in the c-corporation, they will pay gain on the increased value of their shares.  In contrast, the tax basis of remaining s-corporation shareholders and partners in an LLC or partnership can be increased, regardless of whether the chosen method is a cross-purchase or a redemption.

In addition, if the entity using the redemption agreement is a c-corporation, then attribution rules may prevent the redemption from being considered a “complete redemption”, and, thus, may be considered taxable as a dividend to the departing owner.  This is particularly relevant when the remaining owners are closely related to the departing shareholder.  Further, a redemption of c-corporation shares may have alternative minimal tax consequences if the corporation receives insurance proceeds to fund the transfer.

Regardless of the entity’s tax status, insurance proceeds going to an entity to fund a buy-sell redemption agreement may be subject to claims of the entity’s creditors.   A redemption agreement, on the other hand, requires only one life insurance policy per owner and is typically the simplest transfer to structure and implement.

Cross-Purchase Agreements

A buy-sell agreement can also be structured as a cross-purchase agreement.  The cross-purchase agreement can be more complicated.  The cross-purchase agreement requires that some or all of the remaining owners be required to purchase the interests of the departing owner.  If life insurance will be used to finance the purchase, then each owner may need a policy on each of the other owners.  The individual owners would receive the insurance proceeds and will then use the proceeds to purchase the interests of the departing owner.  Since the individual owners, rather than the corporation, purchases the shares, this removes the tax basis issues that exist for c-corporations under a redemption agreement.  Further, for c-corporations, since the individuals receive the life insurance proceeds, the corporation should not encounter any corporate alternative minimum tax issues.

Mixed Agreements

Mixed agreements are those providing options to buy the interests by either the entity or the remaining interest holders followed by either the remaining interest holders or the entity having the right or obligation to purchase.  Either of these parties may purchase life insurance to fund the transfer.  Of course, the agreement can allow new parties to purchase the interests, such as a child of the departing owner.

Funding the Transfer

While much has been discussed in this article regarding the use of life insurance policies to fund buy-sell agreements, life insurance may not be  helpful if it is likely an owner will desire to sell their interests to fund their retirement.  In such case, the entity has several options.  The entity or remaining interests holders could, of course, stockpile cash over time through investments.  In addition, the parties may use insurance policies that will accumulate a cash value.  Still another possibility is the use of an installment agreement whereby the shares are purchased over time from either the entity’s future earnings or through dividends to the remaining interest holders.  Again, if the departing interest holder continues to have interests in the entity, whether directly or through IRS attribution rules, the departing owner of a c-corporation may be considered to have received dividends rather than capital gains.  Depending upon the tax rates then in effect, the IRS the reclassifying the payments as a dividend may have a negative effect.

Estate Tax Uses

The buy-sell agreement generally provides some method of valuation of the owners’ interests, whether by calculation or a fixed amount.  The value, as calculated under a buy-sell agreement, can often be used for estate tax valuations.  The IRS; however, may challenge values to be used for inter-family buy-sell agreements, particularly when the amount is less than reasonable and cannot be justified.  In choosing whether to use a cross-purchase agreement or redemption agreement, a person concerned about estate taxes may favor a cross-purchase agreement.  If an owner dies controlling the majority of a business that used a life insurance policy to fund a redemption buy-sell agreement, then both the business and the life insurance policy could be considered owned by the person’s estate.  Since entity-owned policies are typically used for redemption agreements, this situation may favor the use of cross-purchase agreements for owners with estate tax issues.

In Summary

Buy-sell agreements provide many benefits to business owners, but careful consideration should be used when determining how the buy-sell agreement should be structured.  Since buy-sell agreements are naturally forward-looking, reasonable projections must be made regarding financial requirements, both for funding and valuation purposes.  Moreover, when ultimately the success of the buy-sell agreement requires that the business survive, consideration should be given to ensure the future owners are given the necessary means and training to make this transition successful.  Your attorney, in drafting your buy-sell agreement, should be willing to meet with the owners, financial planners, accountants and any other individual needed to ensure the buy-sell agreement meets the current and long-term goals of the owners and the company.

For additional information or to obtain a buy-sell agreement for your company, please contact Jeff Rogyom at (410) 929-4578.  Please review the Disclaimer page regarding use of this website and its information.

Allegany County
Honorable Rebecca D. Drew
59 Prospect Square, 1st Floor
Cumberland, Maryland 21502
(301) 724-3760 or (888) 724-0148
Fax (301) 724-1249

Anne Arundel County
Honorable Lauren M. Parker
Circuit Courthouse
7 Church Circle
Annapolis, Maryland 21401
(410) 222-1430 or (800) 679-6665
Fax (410) 222-1467

Baltimore City
Honorable Mary W. Conaway
Courthouse East
111 North Calvert Street, 3rd Floor
Baltimore, Maryland 21202
(410) 752-5131 or (888) 876-0035
Fax: (410) 752-3494

Baltimore County
Honorable Grace G. Connolly
County Courts Building
401 Bosley Avenue, Room 500
Towson, Maryland 21204
(410) 887-6680 or (410) 887-6681 or    (888) 642-5387
Fax: (410) 583-2517

Calvert County
Honorable Margaret H. Phipps
Courthouse
175 Main Street
Prince Frederick, Maryland 20678
(410) 535-1600 – Ext. 2256 or (888) 374-0015
Fax: (410) 414-3952

Caroline County
Honorable James L. Phelps
Courthouse
109 Market Street, Room 119
Denton, Maryland 21629
(410) 479-0717 or (888) 786-0019
Fax: (410) 479-4983

Carroll County
Honorable Paul G. Zimmermann
Courthouse Annex
55 North Court Street, Room 124
Westminster, Maryland 21157
(410) 848-2586 or (888) 876-0034
Fax: (410) 876-0657

Cecil County
Honorable Allyn Price Nickle
Circuit Courthouse
129 East Main Street, Suite 102
Elkton, Maryland 21921
(410) 996-5330 or (888) 398-0301
Fax: (410) 996-1039

Charles County
Honorable Loraine D. Hennessy
Courthouse
11 Washington Avenue
PO Box 3080
La Plata, Maryland 20646-3080
(301) 932-3345 or (888) 256-0054
Fax: (301) 932-3349

Dorchester County
Honorable Doris K. Lewis
Courthouse
206 High Street
Cambridge, Maryland 21613
(410) 228-4181 or (888) 242-6257
Fax: (410) 228-4988

Frederick County
Honorable Virginia P. Fifer
Courthouse
100 West Patrick Street
Frederick, Maryland 21701
(301) 600-6565 or (888) 258-0526
Fax: (301) 600-6580

Garrett County
Honorable Rita Watson
Courthouse
313 East Alder Street, Room 103
Oakland, Maryland 21550
(301) 334-1999 or (888) 334-2203
Fax: (301) 334-1984

Harford County
Honorable Derek K. Hopkins
Courthouse
20 West Courtland Street – Room 304
Bel Air, Maryland 21014
(410) 638-3275 or (888) 258-0525
Fax: (410) 893-3177

Howard County
Honorable Byron E. Macfarlane
Circuit Courthouse
8360 Court Avenue
Ellicott City, Maryland 21043
(410) 313-2133 or (888) 848-0136
Fax: (410) 313-3409

Kent County
Honorable Nancy Lee Jewell
Courthouse
103 North Cross Street
Chestertown, Maryland 21620
(410) 778-7466 or (888) 778-0179
Fax: (410) 778-2466

Montgomery County
Honorable Joseph M. Griffin
Judicial Center
50 Maryland Avenue, Room 322
Rockville, Maryland 20850
(240) 777-9600 or (888) 892-2180
Fax: (240) 777-9602

Prince George’s County
Honorable Cereta A. Lee
Courthouse
14735 Main Street, Room D4001
Upper Marlboro, Maryland 20773
(301) 952-3250 or (888) 464-4219
Fax: (301) 952-0908

Queen Anne’s County
Honorable Winsie A. Cannon
Liberty Building
107 North Liberty Street – Suite 220
Centreville, Maryland 21617
(410) 758-0585 or (888) 758-0010
Fax: (410) 758-4408

St. Mary’s County
Honorable Lois A. Duke
Courthouse
41605 Courthouse Drive
Leonardtown, Maryland 20650
(301) 475-5566 or (888) 475-4821
Fax: (301) 475-4968

Somerset County
Honorable Gary W. Miller
Courthouse
30512 Prince William Street
Princess Anne, Maryland 21853
(410) 651-1696 or (888) 758-0039
Fax: (410) 651-3873

Source: State of Maryland Register of Wills

  Please review the Disclaimer page regarding use of this website and its information.

A divorce settlement is not considered a taxable event by the IRS.  Thus, a transfer between spouses that is “incident to divorce”, as defined by the IRS, will not be treated as a sale.  While this may sound great, it also causes many to forget that the property being distributed may be equal in value but not equal for tax purposes.  Since it is not considered a taxable event, the person taking the property will have the same “basis” in the property as when initially purchased.  When that person sells the property, they will have to pay capital gains tax at the time of the sale on all of the appreciation, even if the appreciation occurred while married.  This can cause otherwise equal distributions to be unequal if one person receives property with a lower basis.

The property settlement should also consider the overall taxability of the assets.  For instance, if the spouses split the marital property with one spouse receiving appreciated stock and the other receiving the family’s primary residence, then the spouse receiving the stock may have also received the higher tax burden.   A sale of appreciated stock would result in a tax debt, but gain from the sale of a primary residence will likely be nontaxable if the home appreciated less than $250,000.  The former couple should also consider selling the primary residence if the home has substantially appreciated.  The current exemption for appreciation on a home is $250,000 per spouse.  So, if the home is likely to be sold in the near future and is likely to appreciate to more than $250,000, then the amount may be tax-free if sold sooner rather than later.  If the couple or either spouse has tax liens or debts, then it certainly should be addressed during the property settlement with the help of a tax attorney if your divorce attorney does not have experience in that area.

The couple will have further tax decisions to consider at the time of the divorce.  The parties and their divorce attorneys have some control over the taxability of payments between the parties in the form of alimony and child support.  While child support payment are not deductible by the payor and are not includible as income by the recipient parent, alimony is deductible by the payor and considered income for the recipient.  Therefore, if there is a great disparity in the income tax brackets of the parties, then the parties may wish to consider balancing the payments in consideration.  In addition to structuring the payments between alimony and child support, the parties may determine one will benefit more by being able to deduct the children for income tax purposes.

Additional tax issues can result from the couple’s ownership of a business.  If stock will need to be sold or redeemed as incident to the divorce then the tax consequences should be considered, particularly regarding which party of the divorce will be considered to have sold or redeemed the interests in the business.

Further, if the divorcing couple has retirement benefits under a qualified plan, the parties must consider whether a Qualified Domestic Relations Order, or QDRO, will be needed to transfer the benefits.  The receiving spouse’s benefits, including survivor benefits, will be at risk if this crucial step is skipped, and an improperly drafted QDRO can also have dire tax consequences.  Those thinking a do-it-yourself divorce will suffice will surely wish they sought a good divorce lawyer to represent them.

While a divorce is never a pleasant experience, the pain can be lessened by both parties by properly balancing the tax considerations with their distributions of property, ongoing payments, and other tax attributes.  Seeking advice regarding the tax aspects of your Maryland divorce can leave you in a much better position for starting your new future.

For addition information regarding the tax consequences of your Maryland divorce, please contact Jeff Rogyom at (410) 929-4578.  Please review the Disclaimer page regarding use of this website and its information.

Obviously, when providing such a gift or bequest your intention is to improve the comfort of the person with special needs, not relieve the government of its burden. However, certain government benefit programs require that the person be financially needy. If the person with special needs has assets in excess of $2,000, then the beneficiary will not qualify for Supplemental Security Income (SSI). So, if you gave your child with autism $50,000, then their SSI, Medicaid, and other government benefits could stop and they would need to live on your $50,000 gift until their assets are back to being under $2,000. At the end of the day, the only one benefiting from such a gift would be the government. Because of this and similar issues, attorneys developed planning techniques by which the person with disabilities will receive the benefit of your contribution without losing their medical and other benefits.

While some choose to just give the gift outright to a third-party who promises to care for the person with special needs, this obviously could cause issues. Of course, the third-party may decide they would rather use the funds for another purposes, but they could also lose the funds due to their death or divorce or to their personal creditors. The person with special needs would be much better served if you protected their gift in a trust that’s insulated from creditors, caregivers, and the government.

To protect the assets, the special needs trust is crafted so the beneficiary will not have unrestricted access to the funds. In fact, the trustee may be able to completely shut off the flow of funds to the beneficiary if it jeopardizes the person’s government benefits.  When the trust meets the requirements, federal law will not allow the various agencies to consider the trust’s assets as a countable asset of the beneficiary when determining eligibility.  Hence, the trust will be able to be able to assist the beneficiary with certain expenses to improve their quality of life without allowing the government agencies to stop providing the person’s basic benefits.

The special needs trust must provide language making it impossible for the person with special needs to have unrestricted access to the funds. It must also give the trustee full discretion regarding how the trust’s funds are distributed. The trust must state that it is only intended to fund the supplemental needs of the person, rather than their basic support, which are the expenses covered by SSI and Medicaid. Further, the trust document should state that the trustee must administer the trust so the beneficiary’s right to government assistance is not affected. The special needs trust can either be established at death through your will or as an intervivos special needs trust, meaning you establish it while you are still alive. The slightest mistake could jeopardize the trust in its entirety, so an untrained person should never consider drafting these documents.

The best trustee for a special needs trust is generally going to be close family members of the beneficiary, since they would, for one, care about the beneficiary’s well-being and, second, would be most familiar with the beneficiary’s individual needs. Consideration should be given for the beneficiary’s predicted life expectancy, and successor trustees to assume the responsibilities over time should be named if possible. Nevertheless, flexibility may be a better course in some instances. While the person with special needs may be the focus of your attention, the trustees, family members, and other loved ones who will likely care for him or her should be considered. Those persons’ expenses can be considerable in assisting the person with special needs, and, if possible, should be relieved.

Numerous people can fund a single special needs trust.  By establishing the trust early, you will be able to personally transfer funds to the trust and will also be able to provide relatives with instructions on how to properly direct money for the benefit of the person, i.e. “I hereby leave”… “to the Jane Doe Irrevocable Trust”.  Further, you will be able to provide the trust’s name as the beneficiary of any investment account or life insurance policy.

When possible, the funds should always go directly into the trust rather than first to the person with special needs. There are many restrictions placed upon “self-funded” trusts, including requirements that the person be under sixty-five (65) years of age when funded and that, following the death of the beneficiary, the trust’s unused funds must be given to the state to the extent necessary to reimburse medical expenses it has paid, rather than other relatives or persons you may wish to benefit. Further, being a trustee for a “self-funded” special needs trust is much more difficult than a earlier formed trust, because Maryland places very burdensome requirements regarding documenting and reporting the use of trust funds. Hence, it cannot be overstressed that you should form the trust as soon as possible so every person who may want to contribute to the trust can do so without making the mistake of giving the funds directly to the person. Even if the person does not currently qualify for government assistance, there is always the possibility they may at some point in the future.  In the meantime, anyone who may want to give a gift or bequest to the person may have no way of properly directing the gift.

Nonetheless, when a person with special needs finds comes into possession of funds, whether from inheritance, a lawsuit, or other means, they would still want to put funds into a special needs trust.  Even self-funded special needs trusts provide a substantial benefit to the person and allows the protection of the assets during their lifetime.

Using proper legal and financial planning can ensure that your relative or loved one with special needs will have an opportunity to enjoy a better life than otherwise provided solely by government assistance.

For more information about forming a special needs trust, please contact Jeff Rogyom at (410) 929-4578.  Please review the Disclaimer page regarding use of this website and its information.

The state of Maryland will pursue employees, managers, officers, and owners for unpaid taxes. The person does not need to personally benefit from the tax discrepancy, and needs to have only either fit a certain profile or have been somehow responsible for the nonpayment. It does not necessarily matter that the employee was being ordered to act in a certain way. Regardless of whether it’s justified, merely signing a business check will give some IRS or Maryland Comptroller auditors reason enough to go after your personal assets.

The taxes that can lead to personal responsibility include: the Maryland sales tax, the Maryland use tax, the Maryland admissions & amusements tax, and Maryland employment withholding taxes. These taxes are sometimes referred to as “trust fund” taxes. The term references that, often, the business at issue is not the ultimate payer of the tax and merely collects the tax from a third-party for the state. Once in hand, Maryland and the IRS each treat these collected funds to be their money, and failing to pay it over deserves a harsh penalty. Maryland and the IRS both aggressively enforce these personal responsibility rules. But do not let the “trust fund” name confuse you. Personal tax liability rules also target responsible persons of businesses that are the ultimate payers of certain taxes, such as a buyer that fails to pay its sales or use tax or a business that fails to pay admissions and amusements tax, which is a gross receipts tax.

For Maryland employee withholding taxes, if an employer or payer fails to withhold taxes from an employee’s salary or fails to pay over taxes withheld from the employee’s salary, then the employer or payer can be held personally liable for the amount due the state of Maryland. Further, if the employer or payer is a corporation, then any officer who has direct control over the corporation’s fiscal management can be personally liable. In addition, any agent of a business who is responsible for withholding and paying the taxes can also be considered personally liable. If the entity is an LLC, then any person with direct control over its fiscal management can be personally liable. Fiscal management can include things such as: signing checks or returns, authorizing purchases of equipment, or making strategic business decisions.

Maryland uses a different standard to determine personal liability for its sales and use tax than it uses for withholding taxes and admissions and amusement taxes. Maryland sales and use tax statutes specifically provide that a corporation’s president, vice-president, and treasurer are personally liable for unpaid sales and use taxes. In addition, any corporate officer directly or indirectly owning more than 20 percent of the stock would also have personal liability. If the entity is an LLC or an LLP, but does not have a written operating agreement, then all members or partners will be considered personally liable. However, if the LLC or LLP has an operating agreement, then the Maryland tax statute concentrates personal liability upon those who manage the business and affairs of the company or partnership. “Management” includes signing checks or returns, authorizing purchases, or making strategic business decisions. The Maryland statute does, however, specifically exclude certain duties from being considered management for these purposes.

While responsible person determinations appear to be fairly mechanical, taxpayers can often rebut these Maryland Comptroller claims. This can be a difficult process, and a taxpayer should retain a tax attorney to represent them against a Maryland personal liability tax assessment.

If an employee, officer, owner, or other potentially responsible person finds themselves in a situation where they know the business is unable to meet its expenses, the person should use due diligence to make sure the company’s tax expenses are being paid. Unfortunately, neither ignorance of tax issues nor shifting responsibility to your superior will necessarily relieve you of potential personal tax liabilities. If a person finds that their business cannot survive without “borrowing” from the IRS or Maryland Comptroller, it is always advisable to consider closing the business before incurring a personal liability for the failing business’s taxes or to consider walking away from the business if you have no control over such decisions. A person interested in protecting themselves from such claims should consult a tax attorney to make sure their objections and/or departure from the business is well-documented.

For further information, please contact Jeff Rogyom at (410) 929-4578.  Please review the Disclaimer page regarding use of this website and its information.

While the federal government has several excise taxes, this is the first time one truly deserves the title of a retail sales tax.  Importantly, this is the first time a major excise tax ventured away from companies like airlines and oil refiners and into the strip mall.

To implement this tax, the IRS will need to create specific forms suited for mom and pop retail operations.  And, since the number of “excise” tax returns the IRS receives will substantially increase with approximately 200,000 tanning tax returns per year, the IRS may need to greatly expand its excise tax collections operations.  With forms, software, and personnel in place, it will be quite simple to add “soft drinks”, “flat screens”, and “tires” and notify Walmart of its new filing obligation.

I would like to think this was not designed to push a larger national sales tax (cosmetic surgeons lobbied for this tax to move the target away from themselves), but it did allow the feds to expand into a whole new area of taxation that was formerly an exclusive territory of states and local governments.

Sorry state treasurers, you have one more thing to worry about.

Please review the Disclaimer page regarding use of this website and its information.

Pennsylvania has joined the parade of states that decided to use a tax amnesty for an immediate boost to their state’s revenue.  The Pennsylvania tax amnesty begins on April 26, 2010 and ends June 18, 2010.  Included in the taxes eligible for amnesty are the corporate income tax, the individual income tax, and the sales and use taxes.  This can be an excellent opportunity for businesses and individuals located outside the state to become compliant with Pennsylvania.

The Pennsylvania tax amnesty relieves the taxpayer of all penalties and half the interest due…  The tax amnesty is available for taxpayers who have not filed returns, who have under-reported their taxes due, and who have reported but not paid their taxes.  In addition, this tax amnesty will have a similar effect of a voluntary disclosure program for certain taxpayers.  If the taxpayer applies for amnesty to report and pay taxes that the state previously did not know were due, then unknown taxes of the “same type” due prior to July 1, 2004 will be forgiven.  Thus, if a taxpayer reports and pays unreported or under-reported corporate taxes for the tax years 2006, 2007, and 2008, then all liabilities for corporate taxes that are not known to the state and due prior to July 1, 2004 will be waived.  Some taxpayers should consider comparing the tax amnesty’s relief to that offered under the Pennsylvania Voluntary Disclosure Program, which, if available, may produce a better result for some.

To be considered eligible, the taxes must have been due prior to July 1, 2009.  In addition, taxpayers with certain criminal tax issues are not eligible for the tax amnesty.  The taxpayer must pay the entire amount due, including the tax and the half interest, during the tax amnesty period; however, there are certain options for payment.  Pennsylvania will permit taxpayers to divide the amount into payments if a single payment will create a “serious financial hardship”.

To comply, all relative tax returns must be filed.  In addition, a special tax amnesty application must be submitted to the state.  Finally, following the tax amnesty, those taxpayers who utilized the tax amnesty must maintain certain compliance requirements with Pennsylvania for a minimum of two years.  Taxpayers who do not utilize the amnesty will face an additional 5% penalty following the tax amnesty period.

If you or your company is interested in the Pennsylvania tax amnesty, you may also want to consider hiring a professional to assess your possible tax liabilities to other states as well.  Most states offer ongoing voluntary disclosure programs that will allow you or your company to come into compliance without excessive penalties.

For further information, please contact Jeff Rogyom at (410)929-4578.  Please review the Disclaimer page regarding use of this website and its information.

While most would prefer to obtain an offer in compromise, which reduces the total tax debt, many will not qualify because either their income is too high (by IRS standards) or the taxpayer has too many assets, which includes home equity.  Thus, that taxpayer’s only option may only be to request a payment plan.

To qualify for an installment agreement, the taxpayer will need to be current with their ongoing tax obligations.  In addition, the taxpayer will need to ensure that all required tax returns have been filed.  In many situations the taxpayer may be required to file financial reports showing their income, expenses and available assets.  Depending upon the amount due and time required to pay the amount, the IRS may require documentation of your income and expenses.

If the taxpayer owes a substantial amount to the IRS, then the payment may be in excess of what the taxpayer may be comfortable paying.  Unfortunately, the IRS may require you to make certain lifestyle changes in order to make the payments.  Further, the IRS may require you to include the income of your significant other, even if you are not married, as an available resource.  When IRS required payments are excessive, the taxpayer may be eligible for an offer in compromise or may want to consider filing for bankruptcy to reduce the tax debt.  Further a tax attorney may assist you by appealing unreasonable payment requirements or rejected installment agreements.

A benefit of an installment agreement is that the IRS will no longer be able to pursue most collection actions against the taxpayer, such as a levy against wages or property.  Thus, if you agree to make a $300.00 payment, the IRS will not be able to seize your wages to collect additional amounts.  The IRS payments will be in equal amounts over the designated payment period.  The installment agreement will not stop penalties or interest from accruing in addition to a nominal fee to establish the agreement, so a taxpayer should also consider bank financing in the alternative.

Once the taxpayer has an installment agreement in place, the taxpayer will need to continue making all required current tax payments and file all tax returns.  If the taxpayer becomes further indebted to the IRS, the IRS may cancel the installment agreement for the older debts and resume collection actions.  In addition, the taxpayer’s future tax refunds will be seized and applied toward the debt.  Such additional payments will, however, reduce the installment agreements duration.

A tax professional is often needed to ensure your installment agreement is properly established and to ensure the payments are as reasonable as possible for you and your family.

For further information, please contact Jeff Rogyom at (410)929-4578.  Please review the Disclaimer page regarding use of this website and its information.

The most common way to minimize your potential liabilities would be to have your properties held by and managed by a separate entity with limited liability.  While you may consider the property to be separate from your personal assets, unless you proactively create that separation, an attorney will pursue your personal assets in addition to the value of the property itself…

To make your LLC effective, it is usually advisable to have the LLC own the property, rather than just manage the property.  If you already own the property, there may be costs associated with transferring the property to the LLC.  Further, your lenders will often need to approve the transfer and will request that you personally guarantee their loans.  Nonetheless, the risk of owning an investment property in your own name often far outweighs the associated costs.

All property owned by an LLC will still be at risk for any liabilities.  Thus, you may consider forming multiple entities if you own several properties, particularly if the properties have significant equity or if one property is very likely to create liabilities.  Further, if you flip properties, then you may wish to create new entities.  Lingering liability from a former property could affect your current holdings.  While allowing the property itself to remain at risk may not sound appealing, the alternative is for all of your personal assets to be subject to claims, including your personal home and your future income.

For tax purposes, the most commonly used entity for real estate investments is the limited liability company, otherwise known as an LLC.  A tax benefit of owning real estate through an LLC is that if the LLC is owned by a single member, then the entity is disregarded for tax purposes.  This means all income and losses from the property would not need to be reported on a separate return, and the amounts can be directly entered on the owner’s personal income tax return.

In addition to transferring your property to the LLC, it will be necessary for all business of the property to be handled exclusively by the LLC.  For instance, tenant leases, the roofer’s contract, and the checkbook should name the LLC as the contracting party, rather than your name.  These formalities will make it less likely that an attorney will be able to pierce the LLC veil of protection that prohibits you from being sued personally. One concern for potential personal liability would be for those investing in Baltimore City properties with potential lead paint issues for which an LLC may not be sufficient protection.  That issue should be addressed with your attorney.

Often, real estate investors believe their liability insurance will protect them.  Unfortunately, you should not assume a jury will limit its sympathy for an injured tenant to the amount covered by your liability insurance.  Therefore, the only way to truly be certain that most potential liability from an investment property will not lead to you losing your personal assets is to form an LLC.

In conclusion, holding or managing a property in your own name creates many opportunities to be personally sued.  The only way to truly limit your potential personal liability is to form an entity with limited liability protection.

For further information regarding forming an LLC or transferring your real estate, please contact Jeff Rogyom at (410)929-4578.  Please review the Disclaimer page regarding use of this website and its information.

Many believe their businesses will receive tax or legal benefits for forming in an alternative state, and legal document mills often perpetuate these beliefs to sell incorporation packages… While some businesses benefit from the differing tax laws of other states, the vast majority of small business realize no benefit and forming in another state only creates financial and administrative burdens. For instance, many sell Nevada as a place to incorporate since there is no corporate income tax, but most businesses will not be able to legally take advantage of that tax difference. In addition, your home state often provides adequate legal attributes and liability protections for your business, despite the often promoted liability protection benefits of having a Delaware entity.

Most major corporations choose to register their companies in a handful of states, and this sometimes creates the perception that companies are doing so solely to limit their tax liabilities. Often these decisions are based upon those states’ corporate governance requirements, meaning certain states do not impose many requirements on how a company must be run or funded. Start-up companies that anticipate selling stock to the public often form in Delaware. Other states provide benefits to companies in certain industries, such as the lax usury laws that may attract banks or credit card companies. This does not necessarily mean, however, that the average small business will receive any benefit by following the lead of these corporations.

For tax purposes, if your company operates in Maryland, then it will be required to file a Maryland income tax return in Maryland. Further, the company’s income that originates in Maryland must be reported on the Maryland tax return as Maryland income. The Maryland tax return must be filed regardless of the state that the company chose for formation or incorporation.  Therefore, unless your company has operations in multiple states, then your company usually has no tax reason to form outside its home state.

A small business registering in another state will run into several problems. First, even if the company is registered in another state, most state’s require the business to also register as a “foreign business” in their state and pay the associated fees. Second, the state may also require the company to obtain an in-state mailing address and hire an in-state person to be the company’s “registered agent”. Unless you have a contact living in the state, then you often will need to pay the local person to perform these duties. Finally, by registering in another state, you may find yourself being sued in that state’s courts. Your registration state’s courts will have jurisdiction to accept a lawsuit filed against your small business and may require you to defend your company in a very inconvenient or unfriendly location.

In conclusion, unless you can identify a specific benefit of being registered in a certain state, then you should generally choose to register in your home state. Few businesses benefit from forming in another state. Further, filing in another state may cause you to incur substantial costs and many administrative and legal burdens.  You should certainly consult your attorney before making a choice that may be very costly to reverse.

For further information regarding forming a business entity, please contact Jeff Rogyom at (410) 929-4578.  Please review the Disclaimer page regarding use of this website and its information.

Most states, including Maryland, provide you with the following popular state entity choices: the sole proprietorship, the general partnership, the limited liability company, and the corporation. Other entities for more specialized purposes also exist, such as the limited partnership and the professional association (a P.A. or P.C.).

I. Brief summaries of the four most popular entities:

Sole Proprietorship: A sole proprietorship is the default business entity for any business owned by a single person. The sole proprietorship provides no limited liability (discussed in Section III below) protection for its owner. If you have not chosen an entity and have no partners, then this is likely your current entity. It is not recommended that any active business operate in this form given the owner’s exposure to the company’s liabilities and lawsuits. For tax purposes, the IRS requires income from this form of business be reported on your Form 1040′s Schedule C, or, if real estate, Schedule E.

General Partnership: A general partnership is the default business entity for any business owned by multiple owners. Similar to the sole proprietorship, there is no limitation of liability for the business owners, known as its “partners”. The business generally does not need to file with the state to be considered a general partnership. State laws determine if a partnership exists, whether the owners intend to or not. If the state laws determine the group is a “partnership”, then the partners can be liable for acts of the business and their fellow partners. Similarly, IRS tax laws determine whether the group is a partnership for income tax purposes. For income tax purposes, the IRS requires groups it considers partnerships to file a partnership tax return, Form 1065. The partnership issues a K-1 to each partner which informs both the IRS and the partner how much income and expenses the partner should report on their Form 1040.

Limited Liability Company: The Limited Liability Company, or “LLC”, is today’s most popular entity form. It is the most popular because of its flexibility both in its operation and its available tax classifications. To form an LLC, the entity must be registered with the chosen state’s department that registers businesses, such as the Maryland SDAT (State Department of Assessments and Taxation) or the Delaware Secretary of State. The LLC offers limited liability to its owners, known as its “members”. Thus, if the LLC is sued or otherwise becomes in debt, then the members in most situations will not be personally liable to the creditors of the LLC. LLC members can choose how they want the IRS to tax the entity. Without making an IRS election, an LLC generally will be ignored for tax purposes if it has only one member or will be taxed as a partnership if it has multiple members. But, when making IRS elections, an LLC member or members can choose that the LLC to be taxed as a c-corporation or as an s-corporation (discussed in Section II below). A tax attorney would be able to guide you toward the optimal tax classification for your LLC.

Corporation: The corporation, in its modern form, has existed as a business entity for more than a century. Unlike more recently developed entities, such as the LLC, the laws governing corporations are well-developed. Thus, shareholders can be assured there will be few opportunities for a judge to surprise shareholders with their own new laws. The corporation’s business owners, the “shareholders”, have limited liability. This is the entity form best-suited for companies that foresee themselves “going public” in the near future. But the corporation does have its downsides. Corporate laws usually impose administrative burdens, such as annual meetings, that the more flexible LLC laws usually do not. Further, for tax purposes, the corporation must be taxed as a corporation, i.e. unlike the LLC, the corporation cannot choose to operate as a sole-proprietorship or as a partnership, even when the tax filing requirements seem unreasonable. The corporation may; however, elect to either be taxed as a c-corporation or as an s-corporation (discussed in Section II below). To make the corporation more flexible for small businesses, some states have created simplified corporate forms, such as the Maryland close corporation.

II. Tax Issues in Entity Choice:

While states can create new and unique entities, such as Delaware’s “series LLC”, the IRS lumps them together into a limited number of possible tax entities. For instance, there is no IRS tax form for an LLC. Through IRS eyes, a business with multiple members will be either a partnership, a c-corporation, or an s-corporation with few exceptions.

As stated above, while an LLC is normally taxed as a partnership, an LLC may choose to be taxed as an s-corporation or as a c-corporation. If operating as a c-corporation, the corporation pays taxes upon its income, and the shareholders pay taxes when the income is distributed. Thus, a c-corporation’s income is taxed twice. If operating as an s-corporation, the corporation itself generally pays no income tax and the corporate income is taxed only to the shareholder, regardless of whether the income is distributed. Today, most businesses operating as c-corporations are those that have no choice, such as a widely-held or publicly-traded company, and those with out of the ordinary tax situations.

There sometimes are tax benefits to being a c-corporation, and the proponents of c-corporations often proclaim its superiority with a certain level of fanaticism. But, in general, the advantage of an s-corporation’s single-layer of tax far outweighs any benefits offered by a c-corporation. My experience as a tax attorney is that when a small business operates as a c-corporation, there is a temptation to illegally deduct personal expenses through the business in order to avoid the two-layers of tax. An IRS audit of those businesses can be devastating when discovered personal deductions suddenly turn into huge tax bills for both the corporation and the now dividend-receiving shareholder, plus penalties and interest.  Sadly, many such individuals were placed in that position by a tax consultant’s poor advice. Currently, few small companies have a legitimate reason to choose to be taxed as a c-corporation, and the only reasonable decision for most small companies is choosing to be taxed as either a partnership or as an s-corporation.

III. Limited Liability:

Some entities, such as the LLC and the Corporation, offer limited liability to their owners. Limited liability roughly means that the owners are not personally responsible for the company’s debts and that the company’s creditors can only seize the company’s assets, but there are exceptions. If an owner guarantees or “co-signs” for a company debt, then the company’s limited liability will not protect that the person from the co-signed debt. Despite an entity’s limited liability, individuals also can be personally responsible for tax debts created for “trust fund” taxes, such as employment taxes or state sales taxes. Often, by law, certain liabilities cannot be limited by forming an entity, such as civil or criminal penalties or professional liability. Further, if a court determines that an entity’s owners never truly honored the entity’s existence, then courts can sometimes “pierce the corporate veil” to go after the owners. Veil piercing generally occurs when owners fail to properly separate their personal life from that of the entity, such as commingling checking accounts or doing business in the owner’s name. Additionally, courts can pierce the veil when the owners egregiously fail to adhere to corporate formalities, such as never holding required meetings or never seeking corporate approvals when required.

IV. Conclusion:

In conclusion, taking these factors into consideration, a tax attorney should be able to guide you toward the proper entity choice. The excitement of starting your own business should not cause you to rush this very important decision. Seeking proper advice before committing your company to years of high taxes is well worth the investment.

For further information or to form a business entity, please contact Jeff Rogyom at (410)929-4578.  Please review the Disclaimer page regarding use of this website and its information.

Consider what an auditor generally will request from your business for a sales tax audit:

♦ Accounting books, including income statements, depreciation schedules, balance sheets, general ledgers, and federal & state income tax returns.
♦ Supporting documents, such as sales invoices, purchase invoices, sales journals, purchase orders, bank statements, contracts, and leases.
♦ Exempt sales documents, including resale certificates and exemption certificates.
♦ The sales tax returns and supporting workpapers.

It is not uncommon for an auditor to request more information than is needed, and giving the auditor too much or too little information can make the audit an unpleasant experience. Depending upon the nature of the business and the audit method to be used, the needed information can vary. Needless to say, before you start shoveling documents to the auditor, have your tax adviser review the information. Know where problems are before the auditor does.

The auditor will often ask the taxpayer to waive certain rights or to agree to a certain audit methodology. A tax attorney should be contacted before agreeing. For instance, if your company is fully capable of documenting every taxable purchase made during the audit period and the amount is agreeable, why would you agree to an auditor’s suggestion that sampling be used instead? Unfortunately, before making such a decision, most taxpayers do not request a tax adviser review their books and guide them properly.

The auditor will compare the provided information to your sales tax returns and determine whether there were discrepancies. For instance, the auditor can compare your total sales according to your income tax returns to your sales tax returns, or your sales invoices to your sales tax returns. Further, for purposes of the use tax audit, expect the auditor to compare your property tax return and your depreciation schedules to your reported purchases.  But, with that information in hand, an auditor would be presented adequate information to expand the audit from beyond sales taxes and into income, payroll, admissions & amusements, and other tax areas.

The auditor will certainly be searching for underpayments of taxes, but do not assume the auditor will point you toward tax overpayments. You and your tax adviser must be vigilant to spot errors in the auditor’s calculations, sampling methodology, and legal arguments. Further, tax departments often train auditors on the job and your company may be their classroom, so carefully reviewing the auditor’s workpapers and audit reports is a necessity. Experienced auditors expect taxpayers to have a tax adviser review their work, so do not fear offending them by requiring the auditor to justify their adjustments.

While a sales tax audit may not be a pleasant experience, the audit will present opportunities. For instance, if your tax reporting has been flawed in general, it is not uncommon to actually receive a refund. Further, you may be able to take the information obtained from a satisfactory audit and lock-in those results through a managed compliance or effective tax rate agreement whereby your use tax payments can be automated. Such an agreement allows you to aggregate sales and purchases by accounts and pay use taxes by simply applying the account’s agreed upon taxable percentage.

A sales and use tax audit can be a difficult process for a company and its staff. Whether your company is currently under audit or questioning its compliance, proper preparation and guidance will allow the company to minimize its risks and ensure its tax burdens are minimized.

For further information, please contact Jeff Rogyom at (410)929-4578.  Please review the Disclaimer page regarding use of this website and its information.

Many companies delegate sales and use tax payment and reporting to persons outside their tax departments.  This is often necessary since anyone with purchasing ability or the ability to issue an invoice can cause taxes to be paid or not paid, collected or not collected.  Needless to say, company staff may not perform these tasks correctly.  To reduce mistakes, many companies hire tax consultants to provide opinions and instructional materials that can be followed by their staff.  Tax opinions and a user-friendly sales tax matrix or taxability guide is often the solution.

Companies operating in many states or in areas where tax rules vary are most in need of such services.  A minor error when repeated can become a major issue over time and may have been completely avoided where a tax debt should have been paid by a customer rather than the company.  For instance, Maryland may consider a certain product’s installation to be an installation that becomes part of the real property, while Virginia may not.  The difference can be significant.  One state may require taxes be collected from the consumer while another may require the company to pay the tax on its materials.  This would affect your company’s project bids, your company’s invoicing process, and, of course, the amount ultimately paid the state.  Mistakes can be avoided by knowing each state’s treatment of these repetitively performed projects.

Tax consultants and tax attorneys can provide accurate opinions on each questionable area and for each state where the activity is performed.  Using those taxability opinions as the basis, the tax consultant can then develop a visual  guide by which employees can accurately issue invoices and pay company bills.

Your tax consultant should meet with your company to discover the relevant facts and circumstance surrounding the transactions at issue.  If a tax matrix or taxability guide is desired, then the tax consultant and the company should determine the chart’s necessary scope and depth.  The consultant’s matrix or guide should cite all relevant laws for future use by the company or for audit purposes.  As an additional benefit, the tax consultant may locate substantial refunds during their analysis and may assist you with obtaining the refunds.  A final review of the sales tax matrix may be needed to ensure both its accuracy and is functionality.

Sales and use tax rules have become increasingly complex.  Sales tax opinions or a sales tax matrix can ensure your company and its staff are accurately reporting its sales and use taxes.

For further information or to have a sales tax study performed on your business, please contact Jeff Rogyom at (410) 929-4578.  Please review the Disclaimer page regarding use of this website and its information.

Programs in General

Voluntary disclosure programs differ from tax amnesties.  States continually offer voluntary disclosure programs, in contrast to tax amnesty programs which states only occasionally offer to both non-filers and tax debtors.  Generally, voluntary disclosure programs only enroll non-filing taxpayer who are new to, or reentering, the state’s tax system.  States will not allow enrollment if the state already contacted the taxpayer for audit, though some states do not consider a nexus questionnaire to be a contact.  Voluntary disclosure benefits the company by limiting the number of back tax years or periods to be filed, typically three or four years, and the state often eliminates the company’s penalties and may reduce the interest.

States allow voluntary disclosures for many different taxes, including sales taxes.  But sales taxes that have been collected and not remitted may not qualify for the program.  Some states do not automatically limit criminal penalties for collected but not remitted sales taxes, and, if relevant, the agreement should address this issue.

The Process

Companies should remain completely anonymous throughout negotiations.  Therefore, using a third-party to assist your company, such as a tax attorney or tax consultant, is essential.  Don’t assume a state’s tax administrator will refrain from using the information you provide, staff names accidentally revealed, caller-ID, or Google to identify your company, especially if your company walks away from the state’s offer.  And, the quality of the state’s offer to an identified taxpayer could be affected.

The states generally allow the taxpayer’s advocate to draft the initial agreement.  Some states provide application forms while others will request certain information.  The agreement should be drafted by a professional who knows how to limit every means by which a state can work around a poorly drafted document.  Typically the requested information includes: a description of the company’s activities in the state, when the company first began its activities in the state, whether the company has collected sales tax, whether the state has ever contacted the company, whether the company is registered with the state or filing for other taxes, and why the company never filed in the past.

Additional Benefits

The states will likely request the company register with the state and continue filing for a certain period.  But this could provide an opportunity for the company to request a managed compliance or effective rate agreement.  The company likely performed a self-audit for the voluntary disclosure request, so the company may be a step away from automating their compliance with the state.

Your company’s overall tax situation may have changed by filing in new states.  The company’s tax consultant may perform a review of the company’s overall tax exposure and suggest a tax minimization strategy.  With effective planning the company’s aggregate tax expense may actually be reduced by sourcing income to the proper states.  Further, because the income tax returns have been filed and back years eliminated, the company may also eliminate substantial liabilities it may have booked for FIN 48 purposes, as the company’s uncertain tax positions are now certain.

Conclusion

Tax administrators have become more aggressive in locating non-filing companies.  States now share information and utilize sophisticated data systems in their hunt.  Voluntary disclosure offers an excellent opportunity to reduce your company’s exposure to tax risks and to go forward knowing your first contact with a state will not be a surprise visit to your company’s office by a state auditor.  Filing voluntary disclosures and working with an experienced state & local tax attorney can turn a short-term burden into a long-term benefit.

For further information please contact Jeff Rogyom at (410) 929-4578.  Please review the Disclaimer page regarding use of this website and its information.

All states are becoming more aggressive in locating non-filing businesses, particularly those operating largely outside their state. Unfortunately, many businesses first realize their filing obligation to another state when visited by the state’s auditor. An analysis of your company’s connections, or “nexus”, to the states it touches, directly and indirectly, will be beneficial regardless of whether your business is a start-up or established, expanding or contracting.

Each state’s laws for determining whether your company has a filing obligation vary, but all states are limited by the “minimum contacts” standards established under the U.S. Constitution. Adding to many companies’ confusion, there are separate standards applied for sales and use tax nexus and income tax nexus. For instance, a company with a representative in a state may not have an income tax filing obligation but may have a sales tax obligation.

The Risk

A company should not find comfort in its distance from its customers’ states. States have numerous ways of discovering a company’s activity: an audit of your customer reveals your invoice, your company’s online advertising lists a local phone number, your in-state agent innocently mentions your business during an audit.

The consequences of not filing can be severe. A state’s statute of limitation generally begins to run when a return is filed. Thus, for unfiled returns, state statute of limitation laws will not limit an aggressive comptroller or revenue department from seeking long overdue tax returns and payments, plus interest and penalties. If your company properly reports sales taxes, the seller is merely collecting the tax from the buyer. If your company fails to collect the sales tax, your company will be forced to pay the tax on behalf of the buyer, even if the buyer could have presented you an exemption certificate. And, your payment can rarely be recovered from your customers. With the national average sales tax rate being 8% of the sales price, few companies can painlessly absorb the cost of failing to file six or more years’ sales tax returns. Conversely, a company can be equally harmed by erroneously collecting sales tax or filing income tax returns in states in which it no longer has, or never had, an obligation.

The Solution

Many tax attorneys and large accounting firms offer state tax nexus studies or reviews. These nexus studies or reviews will evaluate your business and its direct and indirect connections to states and will provide written determinations regarding your state filing obligations. Tax advisers can be hired on a state-by-state or comprehensive basis, or may be hired simply to coordinate your in-house compliance efforts.

The tax adviser may offer voluntary disclosure services to minimize the past returns required to be filed and minimize the penalties and interest. With proper planning your company may actually receive a refund depending upon whether income allocations can be adjusted or if certain states’ filings are determined unnecessary. Further, some customers may have paid use tax for which your company may be entitled to a credit.

When choosing a tax adviser for nexus issues, you should consider a tax attorney or an accountant with a legal background. Often, Federal laws and court opinions alone restrict how far states typically will go to tax out-of-state companies, and the states’ guidance to accountants often reflects the states’ expansive intent. Hence, using state guidance without knowledge of the states’ legal limitations will lead to unnecessary filings. Make no mistake, nexus determinations are legal opinions.

The Laws

The governing laws for nexus determinations evolved through court decisions, particularly U.S. Supreme Court cases regarding the Commerce Clause and Due Process Clause of the U.S. Constitution.

For sales and use tax nexus, physical presence in the state is required, but, once found, often is conclusive of the company’s sales and use tax collection and filing obligation. Typical elements indicating sales tax nexus and physical presence can be seen by viewing Maryland’s sales tax nexus statutes:

♦  Permanently or temporarily maintaining, occupying, or using any office, sales or sample room, or distribution, storage, warehouse, or other place for the sale of tangible personal property or a taxable service directly or indirectly through an agent or subsidiary;
♦  Having an agent, canvasser, representative, salesman, or solicitor operating in the state for the purpose of delivering, selling, or taking orders for tangible personal property or a taxable service; or
♦  Entering the state on a regular basis to provide service or repair for tangible personal property.

Notice, agents and other non-employees can create a physical presence. Hence, states can find your company has sales tax nexus even if a single employee has never visited the state. Nonetheless, some states will provide their own safe harbors for policy purposes. For instance, some states with large convention industries exclude a company representative’s physical presence if there to attend a trade show.

For income tax nexus, the Commerce Clause and the Due Process Clause similarly limit states, but, to the behest of companies and their advocates, courts have been reluctant to similarly require companies to have a physical presence. There are; however, separate limitations only applicable to income tax nexus determinations. In 1959, the U.S. Congress, using the power granted it through the Commerce Clause, enacted Public Law 86-272. PL 86-272 provides a safe harbor for certain activities under which states cannot impose an income tax filing obligation.

Further intricacies based upon court opinions and based upon each state’s law will determine whether nexus does indeed exist. Since company facts often fall into nexus gray areas, it is your adviser’s knowledge of these intricacies that will be needed to accurately determine your company’s filing obligations.

The Relevant Facts

When beginning a nexus study or review, the adviser will likely have you complete a questionnaire regarding your company’s activities. Some typical questions to companies include the following:

In state X:

♦ Does the company have a place of business?
♦ Does the company have employees of independent contractors?
♦ Do the representatives have home offices?
♦ Do the representatives use company property, such as laptops?
♦ Does the company have any equipment, inventory, product samples?
♦ Does the company install or repair its product?
♦ Does the company participate in trade shows, host sales meetings, or train users?
♦ Do out-of-state employees or representatives visit?

Each state is different, so the conclusion reached from your responses will also differ.

Conclusion

Many companies take an unnecessary risk by not filing required state returns, particularly sales tax returns. By proactively determining your company’s tax nexus issues, you can minimize your company’s exposure to unexpected tax audits and assessments. Tax professionals can assist you with these nexus determinations and are trained to minimize the burdens of any discovered issues.

For further information or to have a sales tax nexus review performed for your business, please contact Jeff Rogyom at (410)929-4578.  Please review the Disclaimer page regarding use of this website and its information.

The states use numerous names for such agreements, including: managed compliance agreements, formulary sales and use tax agreements, single use tax compliance agreement, negotiated rate agreements, alternative use tax payment methods, simplified procedure agreements, or, as known here in Maryland, effective rate agreements. Regardless of the chosen name, the states use similar processes to form the agreements and the companies often realize fantastic results.

Most companies’ tax staff either have little involvement in the sales & use tax function or are, understandably, more concerned with the company’s income tax issues. Effective rate agreements allow your tax staff to remain focused on their income tax duties while ensuring your company’s proper use tax reporting.

The agreements can assign an effective rate to the company’s expense accounts in aggregate or assign multiple effective rates to the company’s individual expense accounts. The states allow the company’s tax attorney or consultant significant control over the methods used. In fact, many states, including Maryland, allow the company’s tax attorney to write the actual agreement.

While most expense accounts can be included, the states do have certain limitations.  Maryland, like most states, will not allow capital accounts to be included in an effective rate agreement.  Largely, the states’ limitations do not reduce an agreement’s usefulness.

The companies realizing the most significant results are those making a large number of purchases, companies whose purchases include both items for use and items for resale, and companies making significant purchases of materials, supplies, and repairs. The company can request an agreement at any time, including after a favorable sales tax audit.

The states allow the agreements to remain effective for varying durations. Maryland generally allows its effective rate agreements to remain in place for four years. At the end of the period, the states will usually allow the agreement to continue with an abbreviated follow-up study. If the company experiences a material change in its operations, such as closing a plant, the agreements must be amended.

Formalized managed compliance agreements can allow a company to achieve accurate tax reporting, reduce administrative and litigation costs, and reduce unexpected audits. A tax advisor should be able to tell you whether your company would benefit from such an agreement.

For further information, please contact Jeff Rogyom at (410)929-4578.

By conducting reverse audits on behalf of companies, I have rarely found a company whose tax department didn’t have some oversights, particularly regarding indirect taxes.  Likely targets for recoverable overpayments include the company’s indirect taxes, such as: sales & use taxes, value-added taxes, and excise taxes.  Certain state-specific taxes are also likely cash sources, such as the Maryland admissions and amusement tax which is levied upon the business not the customer.

Understandably, most companies’ tax staff tend to focus on federal and state income taxes.  Some companies even delegate indirect tax responsibilities outside their tax departments, such as to their accounts payable staff.  Focusing on recovering use tax overpayments and fine-tuning the accounts payable systems can create both immediate cash and long-term competitive advantages.

The process generally begins by the company sending accounts payable information to the tax consultant.  The tax consultant will evaluate the information based upon their knowledge of your company and industry.  The tax consultant will then request sample invoices based upon their analysis.  The consultant then indentifies areas with needed improvements and where refunds can be requested.  The refund recommendations may be limited to certain tax jurisdictions where refund benefits outweigh tax liability risks.

While larger companies provide more opportunities for tax recovery, some industries are particularly affected by indirect tax errors given their many available exemptions.  Companies in those industries include: manufacturers, contractors, service providers, non-profits, pharmaceuticals, and other high-tech companies.  There are many areas your company likely has not considered as tax refund sources.

With modern electronic accounting systems, the tax recovery process can be conducted with minimal burden upon company staff.  In addition, many tax consultants may agree to work on a contingency or a mixed-contingency basis.  Given the minimal risk, companies should not hesitate seeking tax recovery services.

For further information, please contact Jeff Rogyom at (410)929-4578.

In general, the taxes must have been due on or after July 1, 2001 and before January 1, 2009. Both nonfilers and tax debtors are eligible for the amnesty, so this isn’t solely a voluntary disclosure program. To be expected, there are several requirements for the program, including: filing the past due returns, paying during the amnesty period the tax and half-interest due, and completing an amnesty application issued by LDR. The amnesty participant waives appeals rights.

Do note that portions of Louisiana’s sales and use tax are “administered and collected” both by the state and the local parishes. From discussions with Jefferson Parish, that parish does not intend to match the state’s amnesty program, but continues to offer voluntary disclosure and other penalty abatement programs.

Taxpayers with tax liabilities should take advantage of this rare opportunity. In particular, out-of-state businesses not currently filing in Louisiana should contact an advisor to resolve any possible Louisiana tax issues.

Many business buyers’ greatest challenge is obtaining financing.  While a business purchase requires substantial funding, the buyer’s financing options are numerous.  Factors determining the best financing choice include: the seller’s needs, the buyer’s ability to pay, the company’s cash flow and assets, and the general economic climate.

In certain situations, the buyer’s only available financing source will be the seller, and buyers regularly use installment payment agreements to purchase businesses.  But if the seller needs immediate payment, seller financing may be limited or may require higher interest payments.  The buyer would then need to explore other financing options.

Funding methods generally fall into two categories: debt financing and equity financing.  But business purchases regularly combine both debt and equity financing to meet cash requirements.

Debt Financing

Debt financing means borrowing money in the form of a loan from a third-party.  The source for debt financing can be a bank or other business financing company, but can also include friends and family.  Remember, a buyer’s loan collateral can include both the buyer’s personal assets and the target business’s assets as well.  The buyer should seek a pre-qualified loan, even if the target business has not been identified.  A buyer’s pre-qualifying can improve the buyer’s price negotiations and reduces risks should lending terms change.

The buyer may also obtain financing through Small Business Administration loans and local business promotion programs, such as those provided by Maryland’s Department of Business and Economic Development.  SBA-guaranteed loans generally provide longer terms than loans regularly offered by the bank.  Most commercial financing sources will fund up to 75% of the purchase price.  If the buyer cannot contribute the remaining 25%, the buyer may seek equity financing for at least that portion.

Equity Financing

Equity financing means selling an interest in the business to be purchased.  While not always appealing to a buyer, a silent or limited partner’s contributions will assist with immediate cash needs.  Using a silent or limited partner generally requires the buyer give up some control and profits.  As co-owners, the buying group’s documents such as partnership agreements, LLC operating agreements, and corporate bylaws should consider each owner’s rights and obligations to the company.  These agreements may address issues such as: how much the partner must contribute, whether there will be required payments to the partner, whether the partner has an equity (ownership) interest or only a profits interest, how much control the partner will have, whether the partner can sell their interest, whether the company can purchase the partner’s interest, and, if the company exercises that option, how much the partner will be paid.

Third parties always complicate a transaction, and attorneys may be needed to negotiate the terms and draft the necessary agreements.  You should never presume business partners will honor the deal, and the result of poorly drafted agreements is often litigation and soured relationships.

Customized Financing

As stated above, many buyers choose to combine both debt and equity financing, but the transaction itself can be structured to ease financial constraints as well.  For instance, if the company owns real estate, it may be possible to strip the real estate from the business for a separate sale using traditional real estate financing.  Using a similar transaction, a buyer may be able to locate an investor interested in owning the property, but not the business.    The business buyer would have to be satisfied with leasing the property, but a lease with an option-to-buy or right-of-first-refusal may be a way to make these transactions work for everyone.  Further, certain leasing companies will actually purchase the company’s equipment and lease it back to the company.  There can be both cash flow and tax benefits to such arrangements.

In addition, certain financing companies provide loans on or will purchase outright otherwise illiquid assets, such as the business’s accounts receivable.  While not always the best financing source, certain companies will purchase promissory notes offered by buyers.  For a seller primarily interested in receiving cash, this may be incentive enough to allow a buyer to purchase a business using only a buyer’s note.

In conclusion, while the business purchase requires substantial funding, the financing options are numerous.  Before signing the bank loan, the buyer should consider the benefits of other funding sources.

For further information, please contact Jeff Rogyom at (410)929-4578.

A business transfer’s success or failure often depends upon retaining the company’s employees and their knowledge of the business.  Many times, a company’s most valuable employee is its soon-to-be former owner.  Further, the buyer must consider the company’s obligations to the employees and consider whether employee departures could harm the company.  Of course, the seller showing confidential company information to prospective buyers has concerns as well.

Agreements for Employees:

Generally, businesses will limit their employee obligations through employment agreements.  Companies often require employees accept confidentiality agreements, non-compete agreements, and non-solicitation agreements.  Confidentiality agreements restrict persons from sharing information, while non-compete agreements restrict the person from working for a rival.  Non-solicitation agreements limit the employee’s ability to encourage fellow employees to follow them to a new employer.  In addition, employment agreements should limit an employee’s ability to claim ownership of their work-product, such as client lists.  As a buyer of a business, you cannot assume your predecessor properly protected the business.

The buyer should analyze the company’s employment contracts and related agreements.  Inevitably, some employees will either be dismissed or leave following an ownership or management change.  But do not focus solely upon those employees.  The buyer’s attorney should review all existing contracts and determine whether the company will need new employment agreements.

Further, the buyer’s attorney should be asked to determine whether the current contracts create any contractual commitments to these employees, particularly any clauses overriding employment-at-will laws or granting severance packages, sometimes referred to as “golden parachutes”.  Other contractual obligations the business buyer can inherit include previously agreed upon compensation, bonuses, and fringe benefits.

Non-compete, or Non-competition, agreements can be crucial to preserving a business.  It is not only salespeople who are worthy of a non-compete agreement.  Any employee with knowledge of your business, its contacts, or its processes could be a valuable asset to your competitor.  The laws regarding non-compete agreements are extensive and vary greatly from state-to-state.  The slightest mistake can make the non-compete agreement unenforceable, so I suggest seeking professional assistance.

Agreements for Sellers:

On a positive note, employment agreements or consulting agreements are sometimes used to retain an otherwise departing owner.  Rather than compensating the owner outright through a lump sum or installment payment, it is often worthwhile to keep the seller involved to make the ownership change less shocking to the business and its partners.  The seller may not be thrilled to remain active in the business, so the consulting agreements should consider delegating specific functions or tasks as a requirement for the employment or consulting agreement.

The seller should be required, as part of the sale, to agree to confidentiality agreements, non-compete agreements, and non-solicitation agreements.  No matter how intent the seller is to leave the business, the buyer will want to protect their interests should the seller have a change of heart.

Agreements  for Buyers:

Finally, the business seller should consider requiring prospective buyers sign confidentiality agreements. During the business sale process, the seller will be disclosing sensitive business information.  This could be particularly damaging if the potential buyer is in the position to use the information.

For further information, please contact Jeff Rogyom at (410)929-4578.

When purchasing a Maryland business, the buyer must ensure all desired assets are properly transferred regardless of the chosen sale method. As discussed in earlier articles, attorneys will consider many issues when deciding to structure a sale as either an asset sale or a stock sale, including tax and liability issues.  When utilizing an asset sale, the transferring documents must reference and account for all assets purchased. Even if the attorney structures the transaction as a stock sale, the buyer should confirm the purchased company actually owns the desired assets.

All desired assets will need to be documented for an asset sale. A bill of sale can be used to account for most equipment, inventory, and supplies. New deeds must be issued for each transferred real estate parcel. Company vehicles will need to be retitled with Maryland’s Motor Vehicle Administration. If leased equipment is included in the asset sale, then the lease will need to be assigned to the new owner.  Real property transfers and leases are discussed in more detail in a separate article.

In addition to these material assets, the buyer should not forget the company’s intellectual property. If the company has client lists, business processes, trade names, trademarks, or patents, then the buyer should specifically address these assets. Careful attention should be given these assets as many state and federal laws govern intellectual property. In some instances, it can be difficult to determine the true owner of the intellectual property. For example, is the company or an employee the real owner of a valuable patent? A review of the employees’ contracts may be necessary.

Assuming the ownership transfer is successful, intellectual property owners must regularly submit notices to regulatory agencies to preserve their rights. The time of sale would be a proper occasion to investigate upcoming trademark filing deadlines.

For further information, please contact Jeff Rogyom at (410)929-4578.

For many businesses, the business location is its most valuable asset.  This remains true even if the company only leases the location.  Therefore, maintaining the right to use the property following the transfer is of utmost importance.  If the lease is valuable to the buyer, it should not be assumed the seller has the right to sublease or assign the lease to the buyer.

As early as possible, an attorney should review any lease agreements and should contact the landlord to gain approval for a sublease or assignment.  Generally, lease agreements will not permit a sublease or assignment, but do not lose hope.   First, the lease agreement often allows a business to retain the lease if the business entity’s ownership changes.  Second, the landlord may be more willing to allow a sublease or assignment than the landlord’s lease agreement indicates.

In addition, the buyer should note any limitations in the lease agreement on the tenant’s permitted uses of the property.  If not permitted, your dream to change the current coffee shop into a coffee & oil change shop may be dashed.

There are notable differences between a sublease and assignment, and the buyer and seller should be aware.  A sublease is typically a continuation of the current lease, with the seller/tenant remaining responsible should the buyer/subtenant default or otherwise create a liability.  An assignment is an agreement between all parties (current tenant, new tenant, and landlord) that the lease will, going forward, be between the new tenant and the landlord.  An assignment may relieve the former tenant of liabilities for the lease, but, ultimately, the written agreements between the parties will dictate the terms.

If the lease does not readily permit a sublease or assignment, negotiations between the seller, buyer, and the landlord may permit a discussion of the future lease price, term, uses, etc.  Of course, depending upon each party’s power, this may be either favorable or unfavorable.  The transfer of a lease can have tax ramifications as well, so your attorney should be notified of both the assignment and any changes made to the agreement.

Even if not required, it may be advisable to have the seller, buyer, and landlord sign a document acknowledging the sublease or assignment.  When leased real estate is an integral asset of the business, an abundance of caution is warranted.

For further information, please contact Jeff Rogyom at (410)929-4578.

A major consideration when purchasing an existing Maryland business should be minimizing the tax burden.  Certain transactions provide tax benefits to either the purchaser or the seller while providing a tax burden to the other.  Therefore, tax consequences should be considered when determining the appropriate purchase price.  The general rule is that the sale of a business is a taxable event; however, the parties may be able to structure the transaction using a tax-free reorganization.  The IRS provides several forms of tax-free reorganizations, but to qualify the parties must meet numerous requirements.  Since the IRS only allows tax-free reorganizations under limited circumstances, I will first discuss taxable transactions.

As a taxable transfer, the buyer and seller have two general options: using stock sale or asset sale tax rules.  Though conceptually similar, I will discuss the tax consequences of a partnership sale in a separate article.  The seller generally favors a stock sale because the seller is taxed upon sold stock using the capital gains rate (15%).  In contrast, an asset sale’s seller may be required to use the higher ordinary income tax rate for certain sold assets.  The buyer generally favors an asset sale, because an asset sale increases the basis of the company’s assets (rather than the basis of the purchased stock).  Therefore, following the purchase of the business, the buyer may sell assets realizing less income tax and may depreciate the acquired assets for tax purposes using the assets’ new, higher basis.

Balancing the buyer and seller’s opposing tax burdens and benefits requires an analysis by a tax expert.  While, as stated above, certain transaction forms are generally better for one party, an analysis of the company and the company’s assets may conclude the tax benefit to one party is minimal compared to the tax burden to the other.  Therefore, well-advised buyers and sellers generally choose transactions favoring the parties in aggregate, rather than favoring the IRS.

To qualify as a tax-free transaction, the transfer must meet IRS requirements.  Generally, it requires the “seller” to remain a partial owner of the resulting company.  There are several forms of tax-free reorganizations appropriate for buying or selling a business.  Each referencing a paragraph of the Internal Revenue Code, the relevant reorganization formats are known as Type A, Type B, and Type C reorganizations.

Each reorganization type requires some compensation be paid to the seller in the form of the purchasing corporation’s stock.  A Type A reorganization requires at least 50% of the compensation value be paid in stock, while a Type B requires at least 80%.  Type A permits compensation using either voting or nonvoting stock, in contrast to Type B which only permits compensation using voting stock.  A Type C reorganization requires the purchaser acquire 80% of the target’s assets and pay the target solely in voting stock.  Regardless of the tax-free reorganization type, amounts paid in something other than stock are immediately taxable.

State and local taxes must also be considered.  In addition to income and corporate taxes, most states will impose a sales tax upon owned or leased tangible personal property transferred during the sale.   This form of sales tax is generally referred to as a “bulk sales tax”.  The Maryland Comptroller’s bulk sales tax imposes a 6% tax on the price of tangible personal property included in the purchase, unless an exemption applies.  The Maryland bulk sales tax does not apply to inventory held for resale, titled vehicles, and certain production equipment.  The Maryland bulk sales and use tax specifically applies to furniture and fixtures, computer software, business records, customer lists, and non-capitalized goods and supplies.

For further information, please contact Jeff Rogyom at (410)929-4578.

Parties seeking to buy or sell a Maryland business must consider both known and unknown liabilities.  Certain business lines obviously raise more concern for liabilities than others, but you need not purchase a former asbestos company to inherit exposure.  If a buyer purchases a company without considering potential liabilities, the buyer may purchase the seller’s potential lawsuits and contractual liabilities with no recourse against the seller.  In addition, many regulatory and tax liabilities may pass to subsequent purchasers and put company assets at risk.

The transaction can be structured to limit some forms of liability.  If the buyer purchases a business using a “stock sale” transaction, the buyer purchased the entire entity, including its assets and liabilities.  But if the buyer purchases a business using an “asset sale” transaction, the buyer can purchase company assets and limit ongoing exposure to claims originating prior to the sale against the purchased business.

An asset sale alone, however, may not eliminate all liabilities.  The buyer should accept debts necessary to continue the business, and fraudulent conveyance rules limit the seller’s ability to fleece the company of assets at the expense of its creditors.  In addition, if the seller’s liabilities created liens against company assets, then those assets remain at risk.  Buyers must confirm purchased assets are not subject to undisclosed liens.  Liens can result either through commercial financing agreements, through tax debts, or by operation of law.

The buyer should consider these potential liabilities and either account for the liability in the purchase price or seek indemnity agreements with the seller.  Of course, indemnity agreements only have value if the agreement can be enforced against the seller.

From the seller’s perspective, the seller should ensure regulating agencies, suppliers, and other potential creditors no longer consider the seller or the selling business responsible for future company debts.

Only after analyzing potential liabilities should your attorney determine the desired structure for the sale of a Maryland business.  In addition to properly structuring the business sale transaction, the parties’ attorneys should also consider indemnification agreements, contingent payment arrangements, and the escrow of funds.

For further information, please contact Jeff Rogyom at (410)929-4578.

Buying or selling a business in Maryland can be a very exciting time but can turn into a nightmare if not planned correctly.  There are many things to consider, including what structure the transaction will take.  A list of typical structures include:

An Asset Sale – the buyer purchases the business’s assets but not the company itself;
A Stock Sale – instead of assets, the buyer purchases the seller’s corporate shares, LLC interests, or partnership interests;
A Business Merger – the purchased company merges with an existing business;
A Franchise Purchase – the buyer purchases the right to operate a business using the identity, property, or expertise of a franchisor.

The structure chosen by the buyer and seller of a Maryland business can sometimes rightfully ignore the intended result. For instance, a transaction whose ultimate purpose is to purchase the company assets can be structured as a business merger if a merger improves the tax or business consequences. Such a decision requires an attorney with tax and business knowledge.

Generally, the seller’s primary concerns are reducing taxes to be paid, obtaining relief from future liabilities, and ensuring any deferred payments are satisfied. Conversely, buyer concerns include acquiring the business or assets without interrupting the business, ensuring the seller’s claims about the business are truthful, obtaining relief from past or potential liabilities, ensuring the seller will not compete with his former business, and improving the business’s tax attributes, such as the tax basis of assets. Cautious business owners will not proceed through this process without the assistance of a business attorney addressing these concerns.

While the business sale documents address many concerns, there are additional necessary steps to accomplish a successful transition of company ownership.  In addition to the business sale documents, an attorney will often be needed to assign or negotiate the commercial leases, to amend the companies’ standard contracts with suppliers and customers, and to draft the many related agreements.

For further information, please contact Jeff Rogyom at (410)929-4578.