Protecting Assets PDF Print E-mail
Protecting Key Assets During Bad Economic Times

Bad economic times can present opportunities for long term strategic planning.  No question that the current economic climate is a challenge to all business.  Unexpected lawsuits can also present challenges in surviving both the economy and possible business dissolution.

When counseling business owners who want to keep their business and avoid a bankruptcy because of facing either a bad business cycle or a potential business ending lawsuit the first issue to deal with is how to protect the key business assets for the future.  Having worked with different business owners the business planning often starts with them understanding some fundamental survival principles.

Appraisal As Insurance.  The first principle is to plan as if you were going to start a new business, minimize the risk that an unsecured creditors (from the old business) from being able to levy on the key business assets.  Obviously, secured creditors from the old business have to agree to the transfer of any asset to the new business.  So how do deal with the unsecured creditors?  

The answer to the question is to purchase the key business assets at their fair market value.  The reason for this is that you have to make certain that you are in a position to successfully defend a fraudulent conveyance attack by either an alter ego lawsuit or a trustee in bankruptcy.  A qualified appraiser is your insurance policy dealing with this type of planning.

The art form will be how to properly value the assets being transferred.  There are many factors that control the outcome of the appraisal.  This is often based upon the nature of your business and the assets themselves.

Avoiding Tax Traps.  The next basic principle is to avoid or reduce to a minimum any income tax consequence.  Another possible tax trap is avoiding a state sales tax liability.  Again, this often turns on the nature of the business entity holding the assets and the selection of a new business entity and the new ownership.

From a strategic tax planning standpoint having key business assets in a C or S corporation can result in possible double taxation for a C corporation on the sale or transfer of them.  In addition, the loss of possible stepped up basis in the assets (value is readjusted to fair market value) on the death of the business owner.  Because of these two factors it is not uncommon to have key business assets be owned by a limited liability company or limited partnership.

If, for example, a business owner has a C corporation and is experiencing a bad business cycle being able to utilize net operating losses to offset any gain on the transfer of assets to a new business entity can be a big advantage.  If possible sales tax is owed because your business has a resale license, being able plan to fall within an exemption is very important.  For example, making sure that the old business ownership is at least 80% the same in the new business.

Sometimes just separating the assets of a business can make good business sense and be accomplished tax free.

Example. A family-owned plumbing company provides retail plumbing services to homeowners and businesses with existing issues, and owns a fleet of vans used to provide such services. The company also owns and operates a construction services division which provides plumbing installation for new buildings and for building renovation. The renovation and construction associated division operates with larger trucks and separate personnel.
Both divisions are located in a building that has separate entrances and separate signage for each division. The building, vans, trucks, equipment, and inventory are all owned and operated by this single company, an S corporation. Recently, the family has become concerned that one of the vans may be in an accident, causing serious injury to a creditor. The family would like to structure the assets owned by the plumbing company in such a manner so that the creditor exposure could be minimized.
Solution. A New Parent S Corporation is established, and the stock of the historical operating entity is transferred thereto. The retail plumbing operation remains under the historical operating entity, with its inventory and four of the 19 vans. The other 15 vans are transferred to a newly established, separate LLC owned by the New Parent S Corporation. The trucks are transferred to a separate LLC that is also a subsidiary of the New Parent S Corporation, and the construction division is transferred to another separate LLC that is also a subsidiary of the New Parent S Corporation. The value of the historical entity thereby is reduced to the value of the inventory, the four vans, and the goodwill of that portion of the business.
 

How Falling Interest Rates &

Assets Values Affect Tax and Estate Planning

I attended the USC Tax Institute last month.  One of the major themes dealt with certain types of favorable tax planning options during the current economic downturn.  The planning was based upon two principles.  More...