How to Avoid the Nightmare of Giving Up Business Ownership

Business Attorney in Los AngelesContinuing from our last post, Pitfalls of Giving Up Equity in a Business Venture, Ownership of your business is key. It is the symbol of your own hard work and passion, and security for the success of your future decisions. The more ownership you give up, the more you assume the responsibilities to other parties who can hold up your progress, especially if they have selfish or malicious intentions.

Don’t make life more complicated. It at all possible, avoid giving away ownership. To help you in this key strategy, here are some basic tips:

  1. Work with you attorney to develop a rock solid Buy-Sell Agreement that protects your interests and decision making capabilities.
  2. Include stock option plans, profit participation programs, bonuses, and incentive-based programs to mitigate equity grants.
  3. Evaluate key man insurance, disability policies, and other strategies that emphasize employee benefits without giving away ownership.

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Pitfalls of Giving Up Equity in a Business Venture (Part 1)

Pitfalls of Giving Up Equity in a Business VentureFrom entrepreneurs to trusted advisors, financing a new business venture can be extraordinarily challenging. When you are considering your options, however, be very cautious about giving up ownership. Such a strategy can help get your business started in the short run, but it also can be a complete headache in the long run.

An Ounce Now, A Pound Later…

  • Imagine that you are an entrepreneur with a great idea and superb business model, but no start-up capital, or at least not enough to take flight with your business. You go to your parents, spouse, brothers, sisters, friends, and your spouse’s brothers, sisters, and friends (you get the picture).
  • They spare you some change, and in return, you offer them something as a symbol of your gratitude, something that will pay huge dividends later when your idea takes off and the big-money suitors come knocking: ownership in your business
  • A few years later, guess what? Congratulations! A large publicly traded company wants to acquire your business. Your hard work has paid off. Your potential acquirer wants to write you a check for several million dollars. All you have to do is cross your “t”s and dot your “i”s and the deal is done. In order to do so, however, your attorney tells you to have a meeting, take a vote, and make sure all of the other owners are on board.

Uh-Oh, I Didn’t Forsee This…

From the initial start-up capital to the equity you granted key employees, your business now has 10 other co-owners, all of whom are entitled to vote on the proposal. By the way, as part of the acquisition, the acquirer wants to move your operations to Ohio. Plus, in the years since you started the business, you and your spouse went through a messy divorce, but your ex-father-in-law and ex-brother-in-law are still owners. (Trust us; we’ve seen this and much worse …)

With all of these variables, do you think getting a consensus vote from all the co-owners will be easy? Not a chance! Some people are not so keen on the idea of moving to Ohio. Others (your ex-in-laws) see the dollar signs and know that they can make life very difficult for you if they refuse to go along with the acquisition.

What’s the Solution?

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Walking Away Equally Unhappy

Event: ProVisors Panel on Negotiation
Venue: Calabasas Country Club
Location: Calabasas, Los Angeles, Ca
Speaker: Attorney Douglas Schreiber of Anker, Hymes & Schreiber, LLP

Transcription:

There is something that I constantly heard over and over again from judges when you would be at a settlement conference. Every judge would give the lecture and I’m sure every lawyer who is in this room has been in front of a judge at some kind of settlement conference has heard it: (more…)

Business Disputes and Succession Planning

Event: ProVisors Panel on Negotiation
Venue: Calabasas Country Club
Location: Calabasas, Los Angeles, Ca
Speaker: Attorney Douglas Schreiber of Anker, Hymes & Schreiber, LLP

Transcription:

I come into the negotiation process typically in a slightly different situation. Mark is looking to build a relationship. By the time I usually get involved, I’m looking to get rid of a relationship, quite honestly:
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Be Willing to Walk Away in a Negotiation

Event: ProVisors Panel on Negotiation
Venue: Calabasas Country Club
Location: Calabasas, Los Angeles, Ca
Speaker: Attorney Douglas Schreiber of Anker, Hymes & Schreiber, LLP

Transcription:

Be willing to walk away. That sometimes is the most powerful tool in any negotiation. The ability and willingness to walk away.

Recently my law firm, settled a case where we had been at a mandatory settlement conference in front of a judge. He pounded on us and pounded on us to settle for an amount which was way above our bottom line.

What did we do? (more…)

The Tax Benefits of Incorporation to the Entertainer (Part 2)

Seal of the United States Internal Revenue Ser...

Image via Wikipedia

This is the part 2 of the second section of Anker Reed HSC’s blog series entitled “To Incorporate or Not to Incorporate? That is the Question” regarding the tax benefits of incorporation to the entertainer.

The only difference between a corporation and an individual taxpayer is the application of the rate of tax to the taxable income.” Section 1(c) applies to the individual taxpayer and requires taxation at the highest level of 39.6%. Section 11, which applies to the corporate taxpayer, requires taxation at the highest level of 35%. While it may seem that the 4.6% difference in maximum taxation rates is inconsequential, the §1(c) rate of 39.6% is applied to taxable income over $250,000. The §11 tax rate of 35% is applied to taxable income exceeding $10,000,000.

The foregoing analysis, though, is altered when applied to a personal service corporation (“PSC”) (also known as a loan-out corporation). Section 11(b)(2) states that the qualified PSC will be taxed at a rate of 35%.  “The [Internal Revenue] Code provides for the taxation of the taxable income of certain personal service corporations at the highest corporate [tax] rate, thereby depriving these corporations of the benefit of lesser, graduated tax rates on taxable income not in excess of $75,000″ (Ness and Vogel, 1991).  The corporation with very little taxable income will be taxed at the same rate as large corporation with a large amount of taxable income. Section 11(b)(2) only applies to those PSCs that are qualified as defined by Internal Revenue Code § 448(d)(2).

Therefore, a corporation which is substantially involved in the performing arts (among other specified industries, including accounting, law, and engineering), and where substantially all of the stock in the corporation is held either directly or indirectly by an employee performing the services in which the corporation is substantially involved, then the corporation is a qualified PSC.

* For specific inquiries regarding a tax planning legal matter that you may have, you are welcome to visit our Woodland Hills Tax Lawyer services page.

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To Incorporate or Not to Incorporate? THAT is the Question (Part 6)

This is part 6 of Anker Reed HSC’s blog series entitled “To Incorporate or Not to Incorporate? That is the Question”.

The tax implications for an LLC (limited liability corporation) are identical to that of a partnership. ” For federal income tax purposes, the LLC is not a separate taxpaying entity and is not subject to tax at the entity level. Instead, the LLC’s members report their respective distributive shares of LLC income, gain, loss, and deduction and credit on their individual federal income tax returns.” (Continuing Education of the Bar of California, 1999)

The tax treatment of an LLC by the state of California may also be problematic to the entertainer. Whereas the LLC and partnership will pay the same annual franchise tax that a corporation pays ($800), an LLC will be charged, pursuant to California Revenue & Taxation Code § 17942(a)-(b), an additional fee if there is net income exceeding $250,000. The additional fee is specified in the California Revenue and Tax Code and provides for the fee to be graduated at specified levels of income. Taking our earlier example of the partnership that has $1,000,000o taxable income, should this partnership be an LLC, there would be an additional fee of $5,190 assessed.

Other popular business entities include sole proprietorships, general partnerships, limited partnerships, and limited liability partnerships. It is not important that we analyze each of these entities with regard to the tax effects. What is important, though, is that we note that over time these entities have been regarded as being inappropriate for application to the entertainer. For example, the sole proprietorship provides no tax benefit insofar as taxes are assessed on the sole proprietor at the individual rate.

Furthermore, the purpose of this blog series is to assess the benefits and detriments of incorporation to the entertainer. An examination of all of the business entities and their utility to the entertainer would be of no use, for attorneys and accountants have long-held that an entertainer’s decision is solely whether to incorporate or remain a non-taxpayer. Therefore, the main consideration will be whether incorporation is beneficial to the entertainer as taxpayer.

* For specific inquiries regarding a business legal matter that you may have, you are welcome to visit our Los Angeles Business Attorney services page.

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To Incorporate or not to Incorporate? THAT is the Question (Part 2)

Cover of "Boxing Helena"
Cover of Boxing Helena

This is part 2 of Anker Reed HSC’s blog series entitled “To Incorporate or Not to Incorporate? That is the Question”.

“The ‘loanout’ company is a ‘Hollywood’ term for a device that has received wide acceptance among doctors and lawyers-the personal service corporation.”(Klinger, 1986) “In the typical loan-out, an individual service provider forms a corporation in which she is the sole or majority shareholder as well as the sole or principal employee. The corporation then negotiates with a third party-the ‘borrower’–to ‘lend’ the services of the controlling shareholder-employee for a price.” (LaFrance, 1995) The third party will then pay the amount of the contract to the loan-out corporation, which will then pay a salary to the shareholder/employee. A studio or production company will usually not contract with the loan-out company unless it specifically expresses that the contract is for the services of the entertainer and the entertainer has signed the contract on his or her own behalf. A lawsuit involving Kim Basinger and the producers of the feature film “Boxing Helena” addressed this issue.

The contract for Ms. Basinger’s services was between the production company, Main Line Pictures, Inc. and Ms. Basinger’s loan-out company, Mighty Wind Productions, Inc. Ms. Basinger signed the contract as an agent for her loan-out company, but nowhere did she sign on her own behalf.’ The contract was between Main Line and Mighty Wind; Ms. Basinger, as an individual, was not a party.’ Therefore, it appeared that it was not Ms. Basinger who was obligated to perform on the contract, but it was Mighty Wind who was so obligated.

In an unpublished opinion by the California Court of Appeal, it was stated, “If the contract is only with Mighty Wind, then only Mighty Wind can be liable for breach of the contract.”

* For specific inquiries regarding a business legal matter that you may have, you are welcome to visit our Business Disputes legal services page.

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