Posts in: December

5 Legal Tips to Start 2016 on the Right Foot

December 29, 2015 Business planning, Corporations, Estate Planning, Law, Small Business, Tax Planning Comments Off on 5 Legal Tips to Start 2016 on the Right Foot

As one might expect, the dawning of a new year presents many great opportunities for legal planning. In fact, many of us procrastinate quality legal planning during the year because of our hectic lives…not because we don’t value its importance. However, life comes at us fast and it’s truly difficult to step back and look at the trees and focus on the areas of our business that need some legal attention. Here are five legal tips to help make sure 2016 is a Happy New Year for you, your family and your business.

1) Review your business structure. Maybe your business was brand new in 2015 and you have been operating as a sole proprietor or maybe you bought your first rental in 2015 and decided to take title in your own name. Both of these are certainly reasonable reasons to do business without the help of an incorporated business entity. However, choosing the right business entity for the right situation (and incorporated or organized in the right state) can help protect your personal assets from the liabilities of your rental property or operational business and may end up saving you THOUSANDS in taxes. Moreover, some of you may have an entity you haven’t maintained properly over the years. Out of haste and other business matters you have ignored the corporate formalities of doing Minutes or updating your Operating Agreement or Bylaws. This is as perfect time of year to get that new entity or update your current business structure.

2) Plan for what happens when you’re gone. I’m not trying to be morbid, but no matter how young or healthy you are, it’s possible that 2016 could be the year you die. Nobody likes to talk about it, but death happens even to the best of us! What will happen to your assets or business if tragedy strikes and you don’t make it to my year-end article for 2017? More importantly, if you have minor or adult dependent children, who will take care of them when you’re gone? If you have failed to plan, the simple answer is that the state will decide. Even if you have a will, without a trust in place your heirs will likely need to file at least one action in probate court if you own any real estate at all. A little planning now can save your heirs the time, headache and worry of the probate process – not to mention thousands in legal fees.

3) Get it in writing. If you own your own business, you likely have contracts with dozens of people and/or business entities – vendors, customers, partners, etc. Many of these contracts may currently be verbal “handshake” type deals. I know we’d all like to imagine we live in a world where business can actually be done this way. Unfortunately, the reality is we live in a world where communication is imperfect and honest differences can exist (and disputes can arise) even when all parties are acting honestly. This is not to mention the sad reality that not everyone you have a business relationship with will act 100% honestly all the time. For these reasons, having specific written contracts detailing the actual nature of your business relationships is absolutely vital. Spending a few hundred dollars getting your contracts dialed in now can save you tens of thousands in legal fees over a business deal or relationship if litigation comes to bear.

4) Think about how you classify your employees. Whether you already have folks working for you or are thinking about hiring someone in 2016, how you classify the people that work for you is extremely important. Choose carefully between classifying them as employees or independent contractors. This is a fairly complex area of the law, and it probably makes sense to speak with an attorney if you have questions. Getting the classification wrong can have serious tax and legal consequences. Make sure you get good advice from an experienced attorney so you get this one right. Moreover, don’t forget we are right around the corner from issuing W-2s and 1099s. No matter how you classify your workers, there is important paperwork that needs to be completed by the end of January in order to keep you out of harms way with the IRS.

5) Protect your intellectual property. As your business expands and grows, it’s likely that your intellectual property is doing the same. Almost all businesses have trade secrets – things like customer lists and specific formulas and ways of doing business that are proprietary in nature. However, you lose any protections for your trade secrets if you don’t take steps to keep them, well, secret. It’s also possible that you have a name or slogan associated with your business that you’d like to keep others from using. If so, registering a federal trademark is the best way to protect those rights. Maybe you even have an invention or other idea you’d like to protect with a patent. The point is that as the New Year begins, you should be conscious of the valuable intellectual property you are creating, and should make sure you are taking the proper steps to protect it.

Again, I realize how busy life can be trying to juggle your business, family, health and finances, but it’s important to dedicate a little time to legal matters. In fact, the items above don’t have to take a lot of time or money if you delegate them to your legal or tax counsel over the next month and have a couple follow up meetings. Remember, the best way to eat an elephant is one bite at a time. Don’t get overwhelmed and make a plan over the next few months to consider these important planning points.

Jarom Bergeson is an associate attorney with Kyler Kohler Ostermiller, and Sorensen, LLP (“KKOS Lawyers”) in its Cedar City, Utah office and has extensive experience in helping client register their trademark and protecting their brand identity. He can be reached at jarom@kkoslawyers.com or by phone at (888) 801-0010.

Solo 401(k) Contributions for Sole Propietorship Owners and LLC Owners

December 22, 2015 Business planning, Retirement Planning, Tax Planning Comments Off on Solo 401(k) Contributions for Sole Propietorship Owners and LLC Owners

We recently published an article about Solo 401(k) contribution rules and deadlines for S-Corporation Owners. That article can be found here. But what about a situation where the business that adopts the solo 401(k) is not taxed as an s-corporation?  What if the business is taxed as a sole proprietorship (e.g., a single-member LLC) or a partnership, as is the case with most LLC’s?  Does that change anything?  According to the IRS, the answer is yes.

DO SOLO 401(k) CONTRIBUTION LIMITS DIFFER IF THE BUSINESS IS TAXED AS A SOLE PROPRIETORSHIP OR PARTNERSHIP?

In our prior article written by KKOS Partner Mat Sorensen there was an illustration of a business owner named Sally who owns an s-corporation and that article outlined what solo 401 contributions would look like for her based on net income of $120,000.  For purposes of this article, we’ll call her “S-Corp Sally”.  In order to highlight the differences in solo 401(k) contributions between an s-corporation versus a partnership or sole proprietorship, here’s an example of what solo 401(k) contributions would look like for a partnership or sole proprietorship using the same net income figures as Mat’s example with the s-corporation.

ILLUSTRATIVE EXAMPLE: “SOLE PROP SUSAN”

Susan, age 46, is a technology consultant who owns an LLC that has adopted a solo 401(k) in December 2015.  She is the only owner/member of the LLC and since she has not elected to have her LLC taxed as an s-corporation, by default her business is taxed as a sole proprietorship.  We’ll call her “Sole Prop Susan”.   She has $120,000 in net income for the year, just like S-Corp Sally.  All of Sole Prop Susan’s net income will be reported on Schedule C of her personal tax form 1040, i.e., no wage income / no W-2.  If she decided to take the maximum allowable contribution based on her net income, it would look like this.

  1. Employee Contributions (Elective Deferral) – The 2015 maximum employee contribution for Sole Prop Susan is $18,000. Since she has net income in excess of $18,000, she can contribute the maximum employee contribution of $18,000.  This employee contribution amount will be combined with her employer contribution and reported on line 28 of her tax form 1040.
  1. Employer Contributions – Calculating the maximum employer contribution for Sole Prop Susan is not as simple as with S-Corp Sally. S-Corp Sally’s employer contribution was computed by taking 25% of her wage/salary to arrive at the amount of her employer contribution.  With Sole Prop Susan, there is a more involved computation to arrive at her employer contribution.  A step-by-step calculation can be found in IRS Publication 560.  In short, the IRS reduces net income by the deductible portion of her self-employment tax and also reduces the maximum percentage from 25% to 20%.   There are about 20 additional steps or calculations that must be performed according to the worksheet provided in Publication 560 but basically, if Sole Prop Susan elected to make an employee contribution of $18,000 then her employer contribution would be limited to $22,200 because her overall contribution from both employer and employee contributions would be $40,200.
  1. In the end, Sole Prop Susan would have contributed and saved $40,200 for retirement and reported it on line 28 of her tax form 1040. This is an above the line tax deduction.  Not bad.  If she were in a 20% tax bracket and a 5% bracket for state taxes that saves her approximately $10,000 in federal and state taxes.

Note: If Susan were in an entity taxed as a partnership rather than a sole proprietorship, and the net income allocable to her from the partnership on Schedule K-1 was $120,000 then the contribution amounts above would remain the same and she would still end up with a maximum contribution limit of $40,200.

WHY THE LARGER SOLO 401(K) CONTRIBUTION LIMIT FOR SOLE PROP SUSAN?

You may notice that Sole Prop Susan was able to make a larger solo 401(k) contribution than S-Corp Sally even though their net income was exactly the same.  S-Corp Sally’s maximum contribution amount was $30,500.  The difference was that S-Corp Sally took a wage/salary that was less than her net income, e.g. $70,000.  Sole Prop Susan had to pay self-employment taxes on all $120,000 whereas S-Corp Sally did not.  As an s-corporation owner, there are competing interests to pay the least amount self-employment tax as possible with making the maximum 401(k) contribution – by taking the smallest salary/wage possible (so long as it is reasonable), this reduces your self-employment tax liability but it also limits your solo 401(k) contribution, as was the case with S-Corp Sally.  The IRS gets you coming or going.

IS ANYTHING ELSE DIFFERENT BETWEEN AN S-CORP SOLO 401(k) AND A PARTNERSHIP/SOLE PROP 401(K)?

Everything else about the solo 401(k) that is adopted by an s-corporation is the same as a solo 401(k) that is adopted by a sole proprietorship/partnership.  First, the deadline to adopt the solo 401(k) and have contributions count towards 2015 is still December 31, 2015 regardless of how your business is taxed.  Second, the total overall annual contribution limit is $53,000 in 2015 or $59,000 if you are age 50 or older.  Finally, both employee and employer contributions can be made up to the company’s tax return deadline INCLUDING extensions.   The only difference is that with a “sole proprietorship/partnership Solo 401(k)”, you don’t have the W-2 deadline.

In sum, when it comes to solo 401(k) contributions, all else being equal, how your company is taxed may affect the maximum 401(k) contribution you can make.  Either way, the solo 401(k) contribution limits are very robust, especially compared to an IRA.  Contact our office to find out more about setting up a solo 401(k) plan for your business.

Kevin Kennedy is an associate attorney with Kyler Kohler Ostermiller, and Sorensen, LLP (“KKOS Lawyers”) in its Phoenix, Arizona office and has extensive experience in helping client register their trademark and protecting their brand identity. He can be reached at kevin@kkoslawyers.com or by phone at (888) 801-0010.

How to Keep Your Business Secrets Secret

December 15, 2015 Business planning, Law, Small Business Comments Off on How to Keep Your Business Secrets Secret

Most businesses at some point will have information that helps it to be successful which it wants to keep secret.  It may not be the formula for Coca-Cola or the “secret sauce” for McDonalds, but most business will have some information that it would not want in the hands of a competitor.  Unfortunately, some business owners, in their enthusiasm to get their business off the ground and get their product or service to market fail to take the necessary steps to ensure that the secrets they are developing and relying on for the success of their business remain with the business, and are not stolen by competitors or even their own employees.

A “trade secret” is “any information” that has independent value to its owner because it is not generally known to others in the industry.   Because it can include “any information” not generally known to others, the scope of protectable trade secrets is much broader than what can be protected under patent, trademark or copyright law.   For example, a trade secret could be formulas or methodologies like Coca-Cola formula or KFC’s 11 herbs and spices, or it could be the identity of suppliers that gives you a price advantage, or it could be a specific design of a product that makes your product superior to others.    Many businesses will consider their client or customer information to be valuable information they want to keep secret.

By contrast to patents and trademarks, there is no single source to register a trade secret.   Therefore, the key for a business to protect their valuable information is to develop as many policies and protocols to maintain the secrecy of the information (or in legalese, the information must be “subject to reasonable efforts to maintain its secrecy”).   Examples of steps that can be taken to maximize trade secret protection include:

  • Implementing written policies and procedures to ensure that trade secret information is kept secret and only disseminated or used on a need to know basis, for example, having trade secret information protected by passwords, locks, or stored in a method so that only those who “need to know” can access it;
  • Requiring any employees, independent contractors or third parties vendors who may receive trade secret information sign confidentiality or non-disclosure agreements;
  • Clearly identifying trade secret information as confidential on documents or other tangible locations where it may appear and having specific disclaimers on any items containing trade secret information;
  • If protection is sought for information that was developed over time (e.g. customer or vendor lists), objective evidence showing the time, effort and methodology that was required to develop the information, and that the information was not merely summarized from sources available to the public. For example, a customer list derived merely from copying the phone book would probably not be a protected trade secret, but if the business created a customer list by using a phone book to specifically contact and, through a vetting process, identified only those individuals that met the specific customer profile of the business, such efforts may result in a protectable trade secret.

This is certainly not an exhaustive list, and what are “reasonable efforts to maintain secrecy” will depend on your particular business.   Since there is no single database which you could simply list your trade secret and get the protection, the ability of a business owner to maximize trade secret protection depends on its willingness to implement as many procedures as reasonably possible specifically designed to maximize the secrecy of the information.  It is no accident that Coca-Cola was able to protect its formula from being misappropriated by others for over a hundred years due to the extensive efforts devised by its original founders to maintain its secrecy.  Although most businesses would not go to the same extremes as Coca-Cola, their ability to utilize trade secret protection to become a global multinational conglomerate is a testament to the power of trade secret protection.

Don’t “Bypass” Your Best Planning Option – An AB Trust May Still Make Sense

December 8, 2015 Asset Protection, Estate Planning, Law, Uncategorized Comments Off on Don’t “Bypass” Your Best Planning Option – An AB Trust May Still Make Sense

Remember the “Fiscal Cliff”? In late 2012, you couldn’t turn on your TV, fire up the Internet, or glance at your smart phone without seeing some talking head chattering about how America as we know it would end if President Obama and Congressional Republicans couldn’t come to a deal to avoid the dreaded Fiscal Cliff.

When it was all said and done, the “lifesaving” Fiscal Cliff Legislation was comprised of $500 Billion in automatic tax increases and across-the-board spending cuts, and was generally regarded as a really bad thing for the U.S. economy. Fortunately, bipartisanship (sort of) prevailed, and the American Taxpayer Relief Act of 2012 (“ATRA”) was passed in time to keep us from going over the Cliff.

One important aspect of ATRA was that it brought some stability to federal estate taxes. In the decade prior to the enactment of ATRA, the amount that could be exempted from the federal estate tax bounced around from $1 million to $5 million and the estate tax rate varied from 35% to 50%. The estate tax was even abolished for one year (2010). With the passage of ATRA, the amount of the individual estate tax exemption was set at $5.25 million, indexed for inflation (it is $5.43 million for 2015), and the estate tax rate was set at 40%. Another important change was that a deceased spouse’s unused estate tax exemption became “portable” to a surviving spouse upon the filing of a timely estate tax return.

How did the old law operate? Prior to ATRA and the advent of “portability,” if a deceased spouse left all his assets to his spouse, the couple’s full wealth would be included in the surviving spouse’s estate, but the surviving spouse would only have her own estate tax exclusion to shield their combined wealth from estate tax.  The only way then for a married couple to both provide for a surviving spouse and use both spouses’ estate tax exclusions was by funding a Bypass Trust (also known as an “AB Trust”) at the first spouse’s death.  The Bypass Trust would be funded with as much of the deceased spouse’s property as could be passed free of estate tax using his exclusion, and would then pass tax-free to the couple’s heirs after the surviving spouse’s death.  The Bypass Trust would thus provide for the surviving spouse, but still allow both spouses to use their individual exemptions to maximize what passed to heirs free of estate tax.

The combination of the relatively low estate tax exemption levels and the lack of portability resulted in the creation of thousands upon thousands of Bypass Trusts in the years up through 2012. However, since the enactment of ATRA, Bypass Trusts have been cast aside by many commentators and practitioners as a relic of the past (kind of like pet rocks and pay phones).

After all, who needs a Bypass Trust when a married couple can pass up to $10.86 million (in 2015) free of estate taxes via portability?

The answer to that question may very well be you!

Careful planners realize that are still several potential benefits to a Bypass Trust, and several reasons why you might want to keep the one you have, or establish one as part of your new estate plan. Here are some of those reasons:

  • Nothing In Washington Is Really Permanent. While the estate tax changes in ATRA are supposed to be “permanent,” no law is truly permanent if the political will exists to change it. In fact, President Obama’s Proposed Budget for 2016 called for reducing the estate tax exemption to $3.5 million and increasing the estate tax rate to 45%. Previous Obama budget proposals have targeted portability directly. In his 2015 budget, President Obama proposed restricting portability by only allowing a surviving spouse to use the remaining gift tax exclusion that the deceased spouse could have used for lifetime gifts during the year of the deceased spouse’s death.

None of these changes have been enacted, but someday they might be and portability could theoretically be eliminated in its entirety. In such a situation, only married couples with a Bypass Trust would be able to double the amount of their estate tax exemption.

  • Protecting the Intentions of the First Spouse to Die. When assets are left directly to a surviving spouse, that spouse often has the right to change the trust terms.  The Bypass Trust is irrevocable on the first spouse’s death, so it locks in the intentions of the first spouse to die. This can be particularly important in situations where one or both spouses have children from a previous relationship or where there’s a concern that the surviving spouse might change beneficiaries in a way that would be unacceptable to the deceased spouse.
  • Protection from Creditors. The irrevocable nature of the Bypass Trust should provide the assets placed in that trust with some measure of protection from the creditors of the surviving spouse. This is because while the surviving spouse would be a potential beneficiary of the Bypass Trust, he or she does not actually have ownership of the assets in that trust.
  • Saving Taxes on an Appreciating Asset. If a married couple owns assets that are likely to greatly appreciate in value (perhaps valuable real estate or an ownership interest in a successful business) the Bypass Trust can help save or perhaps even completely avoid estate taxes. By placing such assets in the Bypass Trust at the death of the first spouse, those assets may now appreciate in value between the first death and the second death, and completely escape federal estate taxes when those assets pass to the children after the death of the second spouse.
  • Protection against Generation-Skipping Transfer Taxes (GSTT). The GSTT taxes assets that skip a generation, such as a gift by a grandparent to a grandchild.  If the combined amount you might leave to grandchildren or others who would be subject to GSTT is likely to be more than $5 million, you might want to consider a Bypass Trust to ensure that the first spouse to die’s GSTT exemption can shield assets passing to grandchildren from this tax as the GSTT exemption is not portable to a surviving spouse.
  • Protection against State Estate and/or Inheritance Taxes. Approximately 20 states impose an estate and/or inheritance tax in addition to the federal tax (I’m looking at you New York, Massachusetts, Pennsylvania, Illinois and others). If you live in one of these states, you might want to use the Bypass Trust to be sure that each spouse is able to exempt as much of their estate as possible from state estate tax, as state estate tax exemptions are generally not portable under current state laws.

At the end of the day, there is no “one-size-fits-all” approach. Please contact our office if you are concerned about the Bypass Trust you have in your current estate plan, or if you want to discuss the pros and cons of establishing one in your particular situation.

Jarom Bergeson is an associate attorney with Kyler Kohler Ostermiller, and Sorensen, LLP (“KKOS Lawyers”) in its Cedar City, Utah office and has extensive experience in helping client register their trademark and protecting their brand identity. He can be reached at jarom@kkoslawyers.com or by phone at (888) 801-0010.