Question 1

What is the difference between forming a Joint Venture and forming a Partnership?

Accepted Answer

Although both forming a Joint Venture (JV) and forming a Partnership are collaborative projects, they both differ in scope and structure. A JV can often be a short-term project where two or more parties agree to either form a separate legal entity with shared liability or simply conduct the JV under a JV Agreement. A Partnership is typically an ongoing business relationship where parties combine their resources to run a business, sharing profits, losses, assets and liabilities based on the type of partnership and agreed terms.

Question 2

How should my entity be taxed?

Accepted Answer

It depends what your objectives are. For example, how many shareholders the company will have, will there be foreign or corporate owners, do you intend to raise money, will it receive an active or passive income? These factors will dictate whether the entity should be taxed as an S-Corp, C-Corp, Partnership or other election.

Question 3

Should I form an LLC?

Accepted Answer

Forming an LLC can provide several advantages with minimal disadvantages. LLC members can qualify for certain tax deductions, including reduced legal fees and self-employment taxes. Limited liability and asset protection play a key role in LLC structures as well, ensuring the protection of personal assets from business liabilities, which ensures that members will not face any of the debt or obligations pertaining to the business. LLCs offer management flexibility, allowing members to incorporate a dynamic structure that suits their individual and business needs. However, every situation and business is different, so an LLC may not always be the best choice of entity.

Question 4

What is better: a stock sale or an asset sale?

Accepted Answer

It depends on your situation and perspective as the buyer or the seller. As the seller, a stock sale may be appealing because of its possible reduced long term Capital Gains Tax rates and a less complex transaction process in comparison to asset sales. However, as the buyer, asset sales are more attractive because of the ability to select which assets to acquire based on each individual asset’s accompanying liabilities to be inherited.

Question 5

Is my business QSBS elligible?

Accepted Answer

To determine if your business is QSBS elligible, the following requirements must be met:

Business must be a domestic C corporation with gross assets that total to less than $50 million
At least 80% of your business’s assets must be actively used for business operations.
Your business must not be engaged in an exempt activity as defined under s.1202
NOTE: In order to qualify for QSBS tax benefits, you must hold the stock for more than five years.

Question 6

What is QSBS?

Accepted Answer

Qualified Small Business Stock (QSBS) are originally issued shares that are issued by a US C corp that holds assets valued under $50 million at the time of stock issuance. There are additional criteria that must be met beyond this.

Question 7

Can I avoid Federal Capital Gains Tax?

Accepted Answer

Possibly, if the business stock qualifies for Federal Capital Gains Tax treatment under Section 1202 as Qualified Small Business Stock (QSBS).

Question 8

What are the significance of Reps and Warranties in M&A deals?

Accepted Answer

Following appropriate due diligence by the buyer, the Reps and Warranties in any purchase agreement are heavily negotiated. If ever there is a problem down the line, the buyer will point to the affirmative statements made by the seller in this section of the agreement, especially around undisclosed liabilities, such as employment issues, threatened lawsuits and IP infringement.

Question 9

What is a Qualified Personal Residence Trust (QPRT) and how does it work?

Accepted Answer

A QPRT is an irrevocable trust that allows you to transfer your primary residence or vacation home out of your taxable estate while retaining the right to live in it for a set number of years. At the end of that term, ownership passes to your beneficiaries. By doing this, the property is valued at a reduced rate for gift tax purposes, which helps lower overall estate and gift tax exposure.

Question 10

How does a QPRT reduce estate and gift taxes?

Accepted Answer

When you create a QPRT, the IRS discounts the value of the gift to your beneficiaries because you are keeping the right to live in the property for a set term. This discounted value is what’s applied toward your lifetime gift tax exemption, allowing you to transfer a high-value property at a much lower tax cost. Additionally, any appreciation in the home’s value during the trust term occurs outside of your estate, further reducing potential estate taxes.

Question 11

What happens if I die before the QPRT term ends?

Accepted Answer

If you pass away during the trust term, the full value of the residence is brought back into your taxable estate, as though the QPRT was never created. This risk makes it important to carefully choose the trust term, balancing tax savings with life expectancy.

Question 12

Can I still live in my home after putting it into a QPRT?

Accepted Answer

Yes. You retain the right to live in your home rent-free during the trust term. After the term ends, you can continue living in the residence, but you will need to pay fair market rent to your beneficiaries or to the trust. This arrangement can provide an additional estate planning benefit, since those rent payments further reduce your taxable estate without incurring gift tax.

Question 13

What is an 83(B) Election?

Accepted Answer

An 83(b) Election gives those who hold restricted stock the option to pay taxed based on the current value of the stock rather than at time of vesting, which can potentially reduce the overall tax liability if the stock appreciates over time. However, if the stock depreciates or forfeits before vesting, the tax paid on the stock cannot be recovered.

Question 14

Should I utilize an earnout mechanism as a form of payment in an M&A deal?

Accepted Answer

This payment method is becoming more common and often preferred by the buyer, as it allows the buyer to pay a certain amount of the purchase price upfront and the remainder based upon future financial performance. This ensures that the buyer pays a fair price and the seller is compensated for the continued prosperity of the company.

Question 15

Why should I be interested in a sole proprietorship if I want to start a business?

Accepted Answer

A sole proprietorship is the easiest form of business ownership though is rarely the best choice as it is not a separte legal entity form its owner, and therefore there is personal liability. Although it allows a single owner to operate and control a business and its operations, acquiring all profits and liabilities, and is an appealing structure for a new business owner, it comes with a lot of inherent liability issues.

Question 16

What are 'alter ego' liabilities? How can I protect my entities from 'alter ego' liabilities?

Accepted Answer

Alter ego liabilities occur when a court determines that a business is not truly separate from its owner, often due to poor financial practices or failure to follow legal formalities. To shield your entity from ‘alter ego’ liabilities, it’s crucial to maintain clear separation between personal and business finances. Here are a few ways to protect your entities and reduce the risk of personal liability:

Ensure that your business operates with its own bank accounts, financial records, and legal documents.
Avoid commingling personal and business assets, and adhere to corporate formalities, such as holding regular meetings and maintaining proper documentation.
Clearly define the roles and responsibilities within your entity to prevent confusion.

Question 17

Should I consider a stock purchase agreement or asset purchase agreement when preparing for the sale of my entity?

Accepted Answer

Both stock purchase agreements and asset purchase agreements offer pros and cons that must be considered throughout the process of a corporate transaction. The formation of a stock purchase agreement is a straightforward process and allows the buyer to purchase the entire entity, including all of its assets and liabilities. However, this means the buyer may incur any unwanted liabilities. On the other hand, an asset purchase agreement is a more complex process that allows the buyer to select the assets and liabilities they would like to incur. The buyer may be subject to greater tax benefits through an asset purchase agreement than through a stock purchase agreement.

Question 18

Should I elect for my entity to be taxed as a C-corporation or an S-corporation?

Accepted Answer

Choosing whether to elect to be taxed as a C-corporation or S-corporation depends on your individual situation regarding your business. An S-corporation only requires a single layer of taxation. Therefore, an S-corporation does not tax at the corporate level, rather it only taxes the indiviudal shareholders based on their personal tax returns. C-corporations, however, are subject to double taxation, which means the company’s profits are taxed as a whole and again when the profits are, then, distributed to the shareholders.

Question 19

What is the 25102(f)?

Accepted Answer

Section 25012(f), also referred to as the Limited Offering Exemption, of the California Corporations Code states that equity issuances to the entity’s founders are exempt from registering as security offerings.

Question 20

What is the Corporate Transparency Act (CTA)?

Accepted Answer

The newly introduced CTA requires that all reporting companies file a Beneficial Ownership Information Report (BOIR) with the Financial Crimes Enforcement Network (FinCEN) that states any member or shareholder with at least 25% equity in the entity. This is a timely matter and has designated deadlines based on the filing date of your entity:

If your entity was formed before January 1, 2024, you have until the end of 2024 to file the BOIR.
If your entity was formed between January 1, 2024 and January 1, 2025, you have 90 days to file the BOIR.
If your entity was formed after January 1, 2025, you have 30 days to file the BOIR.

Question 21

Which documents should I provide my attorney with in order to conduct due dilligence efficiently in an M&A deal?

Accepted Answer

To ensure an orderly due dilligence process in a deal, it is advised that you provide your attorney with any financial statements, tax returns, IP documents and employee records.

Question 22

What are the differences between a C-corporation and an S-corporation?

Accepted Answer

A C-corporation can be elligible for taxation at the corporate and shareholder levels, whereas an S-corporation allows for taxation at the individual level. C-corporations can have an unlimited number of shareholders with numerous classes of stock; however, S-corporations are limited to 100 shareholders and can only issue one class of stock.

Question 23

What is the importance of an indemnification clause in my purchase agreements?

Accepted Answer

Including an indemnification clause legally obligates the indemnifying party to compensate the indemnified party on the losses suffered from the transaction, including any legal fees, costs, liabilities and damages incurred. As such this is extremely important and an often heavily negotiated clause

Question 24

What is a Deferred Sales Trust?

Accepted Answer

A Deferred Sales Trust allows for an investor’s assets to be transferred to a trust managed by a third party while deferring capital gains tax, similar to the result of a 1031 exhange.

Question 25

What role does AI play in IP considerations?

Accepted Answer

With the rise in AI presence, it is important to include language in purchase and sale agreements that protect IP rights and demonstrate that all parties engaged acknowledge the validation of AI generated works. Furthermore, in due diligence it is extremely important to understadn who owns any of the algorithms and the product produced by any third party AI.

Question 26

What are the risks or downsides of using a QPRT?

Accepted Answer

You must survive the trust term for the tax benefits to apply.
Because the trust is irrevocable, you lose flexibility and cannot undo the transfer once it’s made.
Beneficiaries do not receive a “step-up” in basis, which may lead to higher capital gains taxes if the property is sold.
Legal and administrative costs can be significant, and the strategy is not suitable for everyone.

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