Making An S Corporation Election As A Married Business Owner
If you’re a married business owner and you want your business to be taxed as an S corporation, there are several things you need to know.
The difference between community property and co-ownership of an asset
Let’s take the example of owning a car. If you and your spouse are both on the title to a car, you co-own the car. This means both of you have the right to use the car, sell the car, or do anything you’d like with the car. It also means you are both responsible for paying off any debt or liabilities that arise from the car. If one of you passes away, the survivor automatically becomes the sole owner of the car, without needing to take any additional actions.
But let’s say only one spouse has his or her name on the title. That spouse is the only owner of that car and is the only one (with certain exceptions) with rights and responsibilities attached to the car. When the owner spouse dies, the car would have to be transferred to the surviving spouse via the applicable estate plan or post-death or probate proceeding; it isn’t already owned by the other spouse like in the previous example.
However, ownership of the vehicle may look a little different depending on your state of residence. In many states, such as California, there are rules that make most assets acquired during the marriage “community property” of the married couple. In this situation, each spouse has rights to the property, no matter whose name is on the title. All assets that are considered community property, it’ll be put into the big pot of community property and split evenly. That can result in either one party getting the car and the other spouse getting something of equal value to offset it, both parties splitting the ownership of the car, or the car being granted to both parties but one buys out the other’s share. The main point of community property is that the parties get an even split for assets acquired during the marriage.
Community property rules apply to all assets owned by either spouse, including ownership of a business. Spouses can co-own shares of a business, and, in fact, there may be legal and tax benefits for doing so. However, in the typical case of one spouse being involved with the business while the other is not, it usually does not make sense for the spouses to co-own the shares. Alternatively, if one spouse owns the shares individually, the other spouse may still have a community property interest, even if they’re not an owner.
How to fill out your Form 2553 S Corp Election
If your corporation or LLC decides to be taxed as an S corporation, you must file a Form 2553 with the Internal Revenue Service (IRS). The tax code states that anyone with community interest in the stock must consent to the tax election, and Form 2553 asks for a list of all the owners. If the business owner’s spouse has a community property interest, it seems as though he or she must be listed on the form as well. However, he or she is not an owner, so they shouldn’t be listed as an owner, right? Be warned, if you list your spouse as an owner of the business when he or she is not, there could be serious consequences down the road. So how do you comply with the conflicting rules?
The answer is to list your spouse in the shareholder section but note that he or she is not a shareholder. As you list all of the owners and their information, do include your spouse in the list, and do get his or her signature. However, unlike the actual owners, you will not list any ownership percentages or shares, or any dates those shares were acquired. Instead, you should note that the spouse is a “consenting spouse,” and you can also note that he or she owns 0% or zero shares of the business. This way, you are satisfying both requirements: you are getting affirmative consents to the tax election, but you are not claiming that they are n owner then they are not.
Special considerations for professional corporations
If you are forming a professional corporation, properly completing Form 2553 is especially important. The rules governing professional corporations vary from state to state, but generally, the rules will dictate that only members of that particular profession may be owners of the company. For example, if you are starting a professional veterinary corporation, only licensed veterinarians can be owners of the business (or majority owners of the business). If a non-professional is an owner, the status of the company can be put in jeopardy, and you could lose your entire business entity.
It is of the utmost importance that you comply with the ownership requirements in your state in order to be considered a professional corporation. If you incorrectly complete Form 2553, you’re putting your entire entity at risk. So professional corporations, be warned: If you are considering electing S corporation status, make sure you consult with a professional. You are quite vulnerable if the form is filled out improperly. Problems are easier to prevent than solve.
Source: Goralka Law Firm, 4470 Duckhorn Drive, Sacramento, CA 95834, 916-440-8036
Read More5 Key Factors in Transferring Your Business to a Family Member
The odds are that you’ve put a great deal of yourself into your business. Inevitably, the day will come when you have no choice but to walk away from your business and begin a new chapter of your life. Quite often, businesses are transferred from one family member to another. In this article, we will examine 5 of the key factors you’ll want to consider when transferring your business to a family member.
Factor #1 Gifting Can Have Numerous Benefits
Will you be selling your business to a family member or simply gifting that business? Gifting comes with several major advantages, for example, this approach can reduce your real estate taxes. Also, the gifting process can allow you to maintain a level of control if the agreement is written properly.
Factor #2 The Buy-Sell Agreement
Don’t overlook the importance of the buy-sell agreement, which works to put everything in writing. You may be tempted to forgo a contract since you are dealing with a family member, but this is a mistake, no matter how close you might be with your loved ones. A buy-sell agreement adds clarity to the process, which can help to keep confusion levels low and the chances of success high. When the time comes to transfer your business to a relative, you’ll want an expert to create a document that outlines all relevant details. It should feature everything from the value of the business and the amount being paid for the business to who will be kept on the payroll to what level of involvement you’ll have once the process is finished.
Factor #3 Seller Financing
Seller financing is quite common among sellers, and when relatives are involved it becomes even more common. One option is to consider a private annuity. A private annuity allows for payments to be spread out for many years and can even extend until the end of your life.
Factor #4 Considering the Self-Cancelling Installment Note
In the installment note, it is possible to feature a self-cancelling clause, which can definitely benefit your family in the future. This part of the paperwork will confirm that if you were to pass away before all the payments have been made, the remaining debt can be attached directly to your will. If you are a parent selling a business to a child, then one of the key benefits of an installment note is that it keeps your other children from paying excess income tax on your estate.
Factor #5 Transferring a Business to a Relative and the IRS
You can expect the IRS to take a second look when you sell a business to a family member. The IRS does this to make sure that everything is above board, due to the fact that many past business owners have acted in an unethical manner. You’ll want to be very sure that every aspect of the sale is done professionally and that you have all your paperwork in order.
A business broker can help you deal the unique particulars that come along with selling a business to a relative. Every business is different, and every sale is different too. A professional business broker can help you avoid common mistakes and pitfalls.
Copyright: Business Brokerage Press, Inc.
Read MoreMaintaining Confidentiality Throughout The Process Of Selling A Business
There are two key ingredients when it comes to selling a business: professionalism and confidentiality. If either of these two ingredients is lacking, then you’ll most likely run into problems. Sadly, many sellers see their deals fall apart due to a breach of confidentiality. You certainly don’t want to be among their ranks.
The simple fact is that a breach of confidentiality can negatively impact everyone from suppliers and vendors to creditors. For example, vendors could change their terms and this, in turn, could have a major, negative impact on cash flow. There can be a chain reaction of events that spiral out of control.
The potential negative outcomes of a breach in confidentiality are quite numerous, for example, employees and customers alike could begin to worry about the future of the business. Employees could begin to worry about the safety of their jobs and begin looking for a new position. Dangerously, this situation could lead to changes in management and the loss of key employees. Likewise, customers, fearing instability in the business, could also decide to take the business elsewhere, leading to revenue problems.
Yet another complicating factor comes in the form of the competition. If the competition hears that your business is up for sale, they could sense blood in the water and look to steal your customers.
Ultimately, a breach could give potential buyers cold feet. At this point, it should be very clear that protecting confidentiality is a must. One of the single best ways to ensure that confidentiality is maintained is to opt for an experienced and proven business broker. Business brokers understand the simply tremendous value of keeping things under wraps.
It may be tempting to try and sell your business on your own, but it is vital to understand that doing so can damage your businesses’ reputation. A good business broker knows how to shield your business from breaches of confidentiality. By working with a business broker, not only are confidentiality agreements signed and taken seriously but also you’ll know that prospective buyers are vetted and fully pre-qualified. According to an article on Inc.com, broker feedback has revealed 9 out of 10 interested parties who respond to “business for sale” ads are not qualified to make the purchase. Why would you want to risk giving away key details to these parties?
In short, you’ll have a much better idea of who you are dealing with and how serious they are about buying your business. At the end of the day, there is no replacement for maintaining confidentiality.
Copyright: Business Brokerage Press, Inc.
Read MoreMaintaining Confidentiality Throughout the Sale Process
There are two key ingredients when it comes to selling a business: professionalism and confidentiality. If either of these two ingredients are lacking, then you’ll most likely run into problems. Sadly, many sellers see their deals fall apart due to a breach of confidentiality. You certainly don’t want to be among their ranks.
The simple fact is that a breach in confidentiality can negatively impact everyone from suppliers and vendors to creditors. For example, vendors could change their terms and this, in turn, could have a major, negative impact on cash flow. There can be a chain reaction of events that spirals out of control.
The potential negative outcomes of a breach in confidentiality are quite numerous, for example, employees and customers alike could begin to worry about the future of the business. Employees could begin to worry about the safety of their jobs and begin looking for a new position. Dangerously, this situation could lead to changes in management and the loss of key employees. Likewise, customers, fearing instability with the business, could also decide to take the business elsewhere, leading to revenue problems.
Yet another complicating factor comes in the form of the competition. If the competition hears that your business is up for sale, they could sense blood in the water and look to steal your customers.
Ultimately, a breach could give potential buyers cold feet. At this point, it should be very clear that protecting confidentiality is a must. One of the single best ways to ensure that confidentiality is maintained is to opt for an experienced and proven business broker. Business brokers understand the simply tremendous value of keeping things under wraps.
It may be tempting to try and sell your business on your own, but it is vital to understand that doing so can damage your businesses’ reputation. A good business broker knows how to shield your business from breaches of confidentiality. By working with a business broker, not only are confidentiality agreements signed and taken seriously, but also you’ll know that prospective buyers are vetted and fully pre-qualified. According to an article on Inc.com, broker feedback has revealed 9 out of 10 interested parties who respond to “business for sale” ads are not qualified to make the purchase. Why would you want to risk giving away key details to these parties?
In short, you’ll have a much better idea of who you are dealing with and how serious they are about buying your business. At the end of the day, there is no replacement for maintaining confidentiality.
Copyright: Business Brokerage Press, Inc.
Read MorePrice vs. Value When Selling Your Business
Value is one thing. Price is a different thing.
We appraise every business we list so that the owner knows the “most probable selling price”.
Business owners will settle at more, or less, than the appraised value. This may result from the different motivations and negotiating skills of the parties. As an example a seller compelled to sell urgently through illness may not maximize the price received due to the urgent need to close a deal.
Conversely, a buyer may pay top price because the business offers special benefits for that particular buyer, e.g. location.
Apart from motivations and negotiating skills the deal structure can greatly influence price.
Sellers and buyers need to remember you can’t separate the price from the terms… – an old saying is “you can name the price, if I can name the terms”. “I’ll give you $10M for your business… and pay you $20/mo.” Price could be right in the ballpark but the terms will not work.
Earn-outs have become increasingly common in some sectors. With these, part of the purchase price is withheld for a period of time subject to certain sales or profit targets being met.
Employment, or on-going consultancy can also affect price. A business owner may wish to “cash out” but be happy to continue working for the new owner on a part-time or full-time basis, or provide consultancy services. These arrangements can provide security for the new owner (e.g. retaining relationships) plus cashflow and employment for the exiting party.
A well-thought out deal structure can benefit everyone – maximizing price for the seller, minimizing risk for the purchaser… deals get done when they work well for both sides.
Read MoreEmbracing Retirement And Selling Your Business: 4 Tips For A Smooth Transition
No one works forever. Regardless of how much you love your business, sooner or later you will have to step away. Owning a business can be very demanding. This fact can be doubly true for owner-operators of businesses. The simple fact is that you’ll have to embrace retirement at some point.
Most business owners have never sold a business before and may not know what to expect. The good news is that prospective buyers usually like the idea of buying an established business directly from a business owner. It is key, however, to do everything possible to make selling your business, as well as the transition period, as easy for a buyer as possible.
Prepping your business for sale has many diverse parts that need to be taken into consideration. Prospective buyers want to feel as though they will have a seamless transition, so it’s in your best interest to evaluate what steps you need to take to make the transition smooth.
You are the world’s greatest expert on your business. As a result, you are perfectly positioned to evaluate your business so as to ensure that it is both appealing to a prospective buyer and ready to sell. Let’s take a look at the steps you can take to ensure a smooth transition.
The Top 4 Transition Tips
1. Automate as many processes as possible.
In this way, prospective buyers are less likely to be intimidated by the level of work involved in owning a small business. The odds are good that many of your prospective buyers have never owned a business before. One of the best ways to not scare prospects away is to make owning and operating your business as streamlined as possible.
2. Work with your employees, key customers and vendors to ensure a smooth transition.
Anything that can cause a potential disruption may scare off prospective buyers. Put yourself in the shoes of prospective buyers and think about what may cause you concern if you were evaluating a business. Once you locate those areas of potential concern, do what you can start to remedy them well before placing your business on the market.
3. Pick out your “second-in-command” before you sell your business.
Having a competent and proven “right hand man or woman” that can step in and essentially operate your business is a very attractive asset to have in place when it comes time to sell your business.
4. Consider working with a business broker.
Brokers are expert in the art and craft of buying and selling businesses. They will be able to help you evaluate your business and address areas that need improvement so as to ensure a smooth transition.
Taking these steps will not just make your business easier to sell, but it will also shorten the amount of time it takes to sell. The last thing you want when you are ready to sell your business and retire is for the selling process to drag on forever.
Copyright: Business Brokerage Press
Read MoreKey Elements for Every Partnership Agreement
You should never forget that your partnership agreement is, in fact, one of the most important business documents you will ever sign. Many people go into business with loved ones, relatives or lifelong friends only to discover (once it’s too late) that they should have had a partnership agreement. A partnership agreement protects everyone involved and can help reduce problems that may arise. Outlining what will happen during different potential situations and events in a legal framework can help your business keep running smoothly.
What Should Be in a Partnership Agreement?
Every business is, of course, different; however, with that stated, any partnership should outline, with as much clarity as possible, the rights and responsibilities of all involved. A well written and carefully considered partnership agreement will keep small problems and disagreements from evolving into more elaborate and serious concerns.
There are times to take a DIY approach and then there are times when you should always opt for a professional. When it comes to partnership agreements, it is best to opt for working with a lawyer. Finding competent legal help for drafting your partnership agreement is simply a must.
What is Typically Addressed in a Partnership Agreement?
In theory, a partnership agreement can cover a wide-array of factors. Here are a few points typically addressed in partnership agreements.
What Questions Will a Good Partnership Agreement Address?
- Which partner(s) are to receive a draw?
- How is money to be distributed?
- Who is contributing funds to get the business operational?
- What percentage will each partner receive?
- Who will be in charge of managerial work?
- What must be done in order to bring in new partners?
- What happens in the event of the death of a partner?
- How are business decisions made? Are decisions made by a unanimous vote or a majority vote?
- If a conflict cannot be resolved when must the conflict be resolved in court?
Thanks to partnership agreements, all partners involved can proceed and start a new business with fewer areas of concern. The simple fact is that without a partnership agreement, your business can face a range of disruptions; these would be disruptions that could ultimately spell doom for your business.
Copyright: Business Brokerage Press, Inc.
Read More10,000 Baby Boomers a Day! Are you ready for the 2nd half?
Are You Ready For Your Second Half? One of the greatest social developments of this century has been the extension of lifespan, especially of working lifespan. As a result, a growing number of people expect to find enjoyment in their work. Additionally, as they reach their mid-forties and beyond, the work they have known and loved during their First Half, may no longer be as challenging or hold the same allure as it once did.
A seed begins to grow – an increasing awareness that new stimulus and growth is needed. This is where we begin to take stock of our life and career as we move towards our next major life stage. As “Half Time” author Bob Buford says, “For the Second Half of life to be better than the first, you must make the choice to step outside of the safety of living on auto-pilot. You must wrestle with who you are, why you believe what you profess to believe about your life, and what you do to provide meaning and structure to your daily activities and relationships.”
According to an article that first appeared in Financial Executive Magazine, every day 10,000 Baby Boomers turn 65 and face the question of what to do after retirement. Some of them may be selling a family business or are laid off without much hope of obtaining a comparable job. Many, perhaps most of this group have no idea about what to do next – especially if they don’t want the second half of their lives to be characterized by decline, boredom and increasing ineffectiveness.
Most men and women in their 50s and 60s are immersed in their business or profession and have given little or no thought to the next phase of their life. Their First Half may have been too busy and they just never seemed to find the time to stop and reflect. Finding a new career, parallel career or new life mission means restructuring one’s life and that does require time and self-reflection. If you cannot afford to take the time and solitude necessary to discover your next great thing, then you are not ready to find it. Taking stock provides retiring Baby Boomers with a real opportunity to consciously shape their next major life stage – their Second Half.
What’s a good first step? Set aside some time to spend in solitude with a journal – preferably out in nature. As theologian and philosopher Soren Kierkegaard once said, “If I were a doctor and were asked for my advice, I should reply, Create silence.”
Here are some questions to ask yourself as you take stock of where you are at this moment:
- If my life was absolutely perfect, how would it look?
- What are the values that give purpose to my life?
- What are my passions?
- Am I missing anything in my life right now that’s important to me?
- What do I do so well that I would enjoy doing it without pay?
- What causes do I care about in the community? The world?
I partner with clients that are asking: What now? Where am I headed? What will bring more purpose and meaning to my life? After all, it is only after developing a complete perspective of where we’ve been, and where we stand now, that we can begin to move forward into a new vision for our life. Let me help you create a customized performance roadmap that will help you live out and create inspired impact!
Blog provided by Diane Sansom
(916) 220-5193
http://www.dianesansom.com/
Read MoreEmbracing Retirement and Selling: 4 Tips for a Smooth Transition
No one works forever. Regardless of how much you love your business, sooner or later you will have to step away. Owning a business can be very demanding. This fact can be doubly true for owner-operators of businesses. The simple fact is that you’ll have to embrace retirement at some point.
Most business owners have never sold a business before and may not know what to expect. The good news is that prospective buyers usually like the idea of buying an established business directly from a business owner. It is key, however, to do everything possible to make selling your business, as well as the transition period, as easy for a buyer as possible.
Prepping your business for sale has many diverse parts that need to be taken into consideration. Prospective buyers want to feel as though they will have a seamless transition, so it’s in your best interest to evaluate what steps you need to take to make the transition smooth.
You are the world’s greatest expert on your business. As a result, you are perfectly positioned to evaluate your business so as to ensure that it is both appealing to a prospective buyer and ready to sell. Let’s take a look at the steps you can take to ensure a smooth transition.
The Top 4 Transition Tips
1. Automate as many processes as possible.
In this way, prospective buyers are less likely to be intimidated by the level of work involved in owning a small business. The odds are good that many of your prospective buyers have never owned a business before. One of the best ways to not scare prospects away is to make owning and operating your business as streamlined as possible.
2. Work with your employees, key customers and vendors to ensure a smooth transition.
Anything that can cause a potential disruption may scare off prospective buyers. Put yourself in the shoes of prospective buyers and think about what may cause you concern if you were evaluating a business. Once you locate those areas of potential concern, do what you can start to remedy them well before placing your business on the market.
3. Pick out your “second-in-command” before you sell your business.
Having a competent and proven “right hand man or woman” that can step in and essentially operate your business is a very attractive asset to have in place when it comes time to sell your business.
4. Consider working with a business broker.
Brokers are expert in the art and craft of buying and selling businesses. They will be able to help you evaluate your business and address areas that need improvement so as to ensure a smooth transition.
Taking these steps will not just make your business easier to sell, but it will also shorten the amount of time it takes to sell. The last thing you want when you are ready to sell your business and retire is for the selling process to drag on forever.
Copyright: Business Brokerage Press
Read MoreIs It Time To Become A Business Owner? 3 Questions To Ask Yourself
Many people know that owning a business isn’t for them. But for others, the appeal and lure of owning their own business can be powerful indeed. If you are uncertain as to whether or not this path is for you, there are a few simple questions you can ask to gain almost instant clarity. In this article, we will explore those key questions and help you determine if owning a business is in your future.
1. Are You Dedicated to Growing Your Income?
Quite often people like the idea of making more money, at least in the abstract. But when presented with what it takes, many people realize that they don’t want to do what is involved. Owning and operating a business can be a lot of work and it’s not for everyone. Yet, those who embrace it can find it rewarding in a variety of ways.
Being a business owner is radically different than being an employee. As an employee, you simply don’t exercise much control. Summed up another way, your financial fate is clearly in the hands of someone else: your employer.
However, owning a business means that you can take steps to control your own financial destiny. You can make decisions that will, ultimately, boost the success of your business and in turn increase your own income.
As an important note, statistics show that the longer you own your business the more money you, as the business owner, will make. It is typical for those who have owned a business for ten years or more to earn upwards of six figures per year. If you have had more than one year of experience in running an organization, the yearly salary will likely range from $34,392 to $75,076. However, if you’ve owned your business for more than a decade, you will likely earn more than $105,757 per year.
While there are no guarantees, owning a business can be a path to growing one’s income and wealth.
2. Would You Like Greater Control Over Your Life?
Many opt to start their own business because they want more control. Business owners realize that unless they own their own business their financial fates rest in the hands of someone else. Some people are comforted with this feeling or don’t see a way around it and others are not so comfortable with the realization. If you want greater control over your life, then owning a business might be for you.
Owning a business increases the amount of control a business owner has over his or her life in many ways, not just financial. For example, business owners have more control over how they spend their time, where they work, when they work and who they work with on a daily basis. Instead of being part of a business, you help create, mold and shape it. Clearly, this is a lot of work and it isn’t for everyone, but again the rewards can be diverse and great.
3. What is Your Personality Like?
Owning a business translates to great control, but that control comes with a degree of risk. In the end, you’ll have to determine how comfortable you are in dealing with risk. As a business owner, the “buck” stops with you. You’re risking your time, effort and, of course, money. You also don’t get a paid vacation, sick days or any of the other benefits so often associated with being an employee.
Other traits identified during a study by the Guardian Life Small Business Research Institute showed there are other ideal personality traits for business owners. These traits include collaboration, curiosity, focus on the future, and being self-fulfilled, tech-savvy and action-oriented.
Thinking about these three key questions is the perfect place to start when contemplating opening a business. Additionally, working with a business broker can help you gain clarity and determine if owning a business is right for you.
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