I recently was asked to review a business for the purpose of either getting out of their franchise or negotiating with the franchisor about a possible modification to the business.
As Momma used to say “get your money up front!”
A client had purchased a restaurant by buying the LLC from the previous owner. Well, most of it, anyway. For some reason, the client only purchased 95% of the outstanding membership interests of the LLC, not the whole 100%. I’m still not certain what the rationale behind that was. What I am certain about is that this deal was a train wreck, and the client is doing everything in their power to make it worse.
If you are going to buy an existing business, your due diligence should include review of ALL pertinent documents, including:
- franchise agreement
- vendor contracts
- tax returns
- bank statements
- financial statements
It is always safer for a business purchaser to buy the assets of a pre-existing business rather than the stock or membership interests of the company, so that there are no hidden surprises. However, that may not always be possible.
If you are faced with purchasing an existing business, be certain that you have the appropriate professional review documents and financials before you sign the purchase agreement, whether the professional is a lawyer, qualified business intermediary or accountant. The fortune you save just might be yours.
Prior to the end of 2017, Congress passed the Tax Cuts and Jobs Act (“TCJA”). It has a potentially far-reaching effect on American businesses, especially small businesses formed as LLCs.
Elements of the TCJA include reducing tax rates for businesses and individuals; increasing the standard deduction and family tax credits, but eliminating personal exemptions and reducing itemize deductions; limiting deductions for state and local income taxes and property taxes; limiting the mortgage interest deduction; reducing the alternative minimum tax for individuals and eliminating it for corporations; reducing the number of estates impacted by the estate tax and repealing the individual mandate of the Affordable Care Act.
The threshold for estate taxes will be increased under the TCJA. Under current law, estates over $5.6 million are subject to a 40% tax. The TCJA increases the taxable threshold to $11.2 million and $22 million if married filing jointly.
For pass-through entities such as LLCs and S-corporations, TCJA reduces tax by virtue of a 20% deduction, after which a lower rate of 29.6% will be applied. This benefit phases out starting at $315,000.
The corporate tax rate is reduced from 35% to 21%, with some deductions and credits either reduced or eliminated. The alternative minimum tax for corporations is eliminated.
The TCJA changes calculation of American corporate income tax on overseas earnings from a global to a territorial method. Rather than a corporation paying the U.S. tax rate (35%) for income earned in any country (less a credit for taxes paid to that country), each subsidiary would pay the tax rate of the country in which it is legally established. In other words, under a territorial tax system, the corporation saves the difference between the generally higher U.S. tax rate and the lower rate of the country in which the subsidiary is legally established.
There is a one time repatriation tax of profits in overseas subsidiaries of 7.5%, 14.5% for cash. This is an attempt to have U.S. multinationals bring nearly $3 trillion that has been accumulated offshore, much of it in tax haven countries.