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socrateaser
socrateaser, Lawyer
Category: Tax
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Experience:  Retired (mostly)
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TAX ATTORNEY PLEASE

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Thank you for your time We need an opinion on below: Summary: There are 4 of us as friends: (friend 1, friend 2, friend 3, friend 4) in business. Currently: there are 3 companies Company 1 – A Corporation: - sales about $500k a year – owned by friend 1 Company 2 - Sole proprietorship about $200k a year – owned by friend 2 Company 3 no sales but intellectual property worth $250,000 - $500,000 – owned by friend 2,3,&4 All business are in the same industry. The shareholders of all companies above see value in joining forces and combining all companies as one under one umbrella So essentially friends1, 2, 3, 4, all want to make all companies above one All of us agree to split the new company into 4 equal partners with 25% each stock So my question is what is the best way to do this: a) to protect us from inheriting liability and future protection of liability personally and the company b) Avoid tax liability c) The Simplest way Thank you

Do any of the individuals or legal entities have any liabilities that could result in a third party creditor obtaining a judgment of damages against the individual or legal entity during the next four years?

Thanks in advance.

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Customer: replied 4 years ago.

Thank you


There are none that I am aware of at all.


I want to make sure the new structure projects me.

Then the simplest thing to do is to assign the various interests of parties' 2, 3 and 4 to the corporation owned by party 1 in exchange for shares of stock in the corporation equal to each party's proportionate contribution. Any gain for the corporation would be calculated as the fair market value of the transfer less the basis in the hands of the transferror.

If there is a large gain attributed to the transfer, then it may be better to create a new corporation and have each party contribute assets or property to the new corporation, because as long as the four parties' aggregate ownership after the transfer is at least 80% of the total ownership (and presumably it would be 100%, because there are only four investors involved in the transaction), then there is no tax liability on the transfer.

As far as asset protection goes, a corporation, LLC, or LLP will have equal ability to protect the shareholders after the transfer -- the choice of legal form is largely a question of whether or not you (1) intend to take your business public in the near future -- in which case you will need a corporation form; and (2) if no, then whether or not you care about the added administrative overhead of a corporation (board meetings, resolutions, meeting minutes, etc.).

Hope this helps.

NOTICE: My goal here is to entertain while educating the public about the law. I hope my answer is useful and informative to you. During our conversation, the website may ask you to rate my answer. If you rate my answer lower than the middle rating, then the website retains your entire payment, and I receive nothing. It is entirely your choice as to how you rate my answer. However, because your payment to me is in the nature of a donation/gift, rather than as compensation for any services rendered, you are entitled to know how your rating affects the final distribution of your donation.

If you need to contact me again, please put my user id at the beginning of your question ("To Socrateaser"), and the system will send me an alert. Please Click the following link for IMPORTANT LEGAL INFORMATION. Thanks and best wishes!

Customer: replied 4 years ago.

a) Thanks when you say 'assign the various interests of parties' 2, 3 and 4 to party1'


How is this legally done?
Does party 1 buy the other companies in exchange for stock and then are the other companies closed or does it buy all assest and good will only>


 


and your second option:


 


b)forming new corp.
Is this as simple as making a new corporation?


How does the new company obtain all other entities?
Can we simple transfer all other assess, customer list etc to new company, close all old companies and run everything under the new company?


Thank you for your expertise

a) Thanks when you say 'assign the various interests of parties' 2, 3 and 4 to party1'

 

How is this legally done? Does party 1 buy the other companies in exchange for stock and then are the other companies closed or does it buy all assets and good will only

 

A: A sole proprietorship has no separate existence from it's owner, so in that case, the owner assigns his/her interest in every asset and liability to party 1's corporation, and party one's corporation agrees to assume each liability. Ideally, it would be better for the liabilities to be paid off from the owner's assets before the transfer, and then only transfer net assets -- but, sometimes this isn't possible.

 

With a separate company, such as an LLC, the owner would once again, assign his or her entire interest in the LLC to the corporation in exchange for stock. The corporation would then become the sole owner of the LLC, and it would then control the LLC assets and pay off the liabilities.

 

and your second option:

 

b)forming new corp.
Is this as simple as making a new corporation?

 

A: Yes (assuming that you find forming a new corporation to be simple).

 

 

How does the new company obtain all other entities?

 

A: In the same manner as above, only now, party 1 would contribute 100% of his/her shares to the new corporation in exchange for shares in the new entity, and then the old entity would be dissolved, after all of the assets and liabilities were assigned to the new corporation.

 

Can we simple transfer all other assess, customer list etc to new company, close all old companies and run everything under the new company?

 

A: Yes. See above.

 

Note: There are "assignment of interest" forms all over the internet that you can use to accomplish the property interest transfers. However, if you want to get this done right the first time, I suggest that you hire a qualified CPA with business merger and acquisition experience to adjust the books on each individual's and/or business entity's accounts. This is mostly an accounting problem, in my view -- and it calls for a CPA.

 

Hope this helps.

 

NOTICE: My goal here is to entertain while educating the public about the law. I hope my answer is useful and informative to you. During our conversation, the website may ask you to rate my answer. If you rate my answer lower than the middle rating, then the website retains your entire payment, and I receive nothing. It is entirely your choice as to how you rate my answer. However, because your payment to me is in the nature of a donation/gift, rather than as compensation for any services rendered, you are entitled to know how your rating affects the final distribution of your donation. If you need to contact me again, please put my user id at the beginning of your question ("To Socrateaser"), and the system will send me an alert. Please Click the following link for IMPORTANT LEGAL INFORMATION. Thanks and best wishes!

 

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