Throughout my career as an attorney, I have seen many tax and legal situations which could have been easily avoided if the person had good tax counsel and advice early on. Recently, it has brought to my attention that many people in closely-held and family businesses do not consult any type of advisor when it comes to their tax or legal situation. Given the complexity of the tax and legal environment of businesses in this country, not having good counsel on tax and legal matters is comparable to walking blindfolded through a mine field. Sooner or later the individual is going to be destroyed.
Part of my passion in life is speaking at association gatherings and educating the members about taxes and other issues relating to their business. Most of the time, I also speak to the members (one on one) concerning their tax and business situation in private meetings. Their concerns range from the most complex situation concerning business succession down to the most basic principles of tax law. Here are some common situations that business owners run into when they are not under the advice of counsel:
No Tax Strategy
Many people do not know about the upcoming changes in the tax laws that happen on January 1, 2013. As a consequence, the same people do not know capital gains and dividends are taxed lightly at 15% this year, but next year will be taxed at 20%. In addition dividends are also currently taxed at 15%, but will be subject to ordinary income rates next year. For those operating as a C corporation, it is absolutely imperative to know these facts.
Other people, and this is completely appalling, don’t even file tax returns from year to year. Many of them reason that the government hasn’t cracked down on them yet, maybe they can push it indefinitely. This is absolutely insane! Failing to file taxes year in and year out doesn’t harm the government or their interest, but can put you out of business.
The fact is that there are a whole host of deductions available to businesses. On the other hand, there is also a whole array of pitfalls for the business owner as well.
Among the most severe situation is being assessed taxes, penalties, and interest for years past and not being able to pay them, not having money to retire, and quite simply not seeing any part of your dreams come to fruition despite a lifetime of hard work.
No Business Succession Plan
There are many business owners operating their businesses well into their 60’s that have not named a successor to their position. The fact is, as a consequence of being a living creature, people die. Their business on the other hand, does not have to. If you have a named successor and a business plan, your business can go on and also provide for loved ones in your absence.
Having a key employee or owner falling ill or passing suddenly can destroy any family business. Too often I hear of stories where the owner had the intention of passing the business to the next generation only to pass away suddenly without so much as a will. The fact is that the biggest danger to any small business is not competitors or money. The biggest threat to a small business is the finite existence of the people owning it.
Ironically, some degree of business succession planning is necessary even if you have no intention of passing your business to the next generation. It is important to make your wishes known and to have a formal plan. To carry out those wishes once you retire or pass away. Handing a business to the next generation with massive tax and accounts payable debt is not a good thing for your family.
No Formalities or Even a Formal Entity
The possibility of facing at least one lawsuit during the course of a business enterprise is almost assured. Basic mistakes and omissions are made by even some of the wealthiest, highest income people. Failing to have a corporate record book or even being not incorporated at all is a common occurrence when business owners find themselves served with a summons and complaint with their individual name on the lawsuit. Once this happens, the owners assets are fair game for those named as plaintiffs in the lawsuit.
To be continued….
The fact of the matter is that small business owners need advice the most, but sometimes do not receive it at all. Tax and legal advice does not have to be expensive or time consuming. Not being advised on these matters can be extremely detrimental.
Next month, three easy solutions will be discussed in order to get the uncounselled business person on a track where they can be better prepared to deal with their business, tax, and legal issues. By just doing three simple, inexpensive processes, business owners can start to plan for the future.
By: Dr. Bart Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors