Many people who are already in business and those starting up new ventures are turning to limited liability company status as the preferred form of business organization. There are many reasons for this, including:

• Pass through of profits and taxes to the owners, to avoid double taxation applicable to regular corporations.
• Limited liability for the owner(s) which is not available with proprietorships and partnerships. 
• Absence of the restrictions applicable to S corporations. These relate to the number of shareholders, types of shareholders, and limits on passive income that can be passed-through without prior tax. 
• Ability to make special allocations of income, losses and deductions among the partners, whereas an S corporation must pass these through on a pro rata basis. 
• Ease of formation. New IRS check-the-box rules enable a single owner to obtain the benefits of limited liability for legal purposes, yet be treated like a proprietorship for tax purposes, and avoid the cost of forming a corporation. 
• Utilization of the tax advantages of operating losses. 

Recommending the right kinds of business organizations for clients is just one of many ongoing financial planning objectives on which we focus. We'll be glad to discuss the pros and cons of limited liability companies, partnerships, S corporations, C corporations, and sole proprietorships with you in depth to help you decide on the business vehicle that is most appropriate for your needs. 

Some people are more comfortable about using revocable trusts in their estate planning than using a will. Two reasons for this approach are to avoid the delays and cost of probate at the time of death and to obtain financial privacy. But revocable trusts provide no income or estate tax savings and unless great care is taken, they can add to one's taxes. For example, you really shouldn't name a revocable trust as the beneficiary of your IRA. When the trust is made the beneficiary, the IRA has to be paid out, effectively ending tax deferral on the funds. Had a spouse or other heirs been named as beneficiaries, the IRA could have been rolled over and tax deferral on the funds and future earnings could have continued unabated. We see many estate planning mistakes involving pension plans even when astute and sophisticated people are involved. It's extremely important to be selective about the financial, tax and legal advisors you engage for the planning and implementation or the results may be very different from what you had intended.

Need additional financing to operate or expand your business? There are a variety of possibilities for obtaining the necessary capital. They include:

• Unsecured and secured bank loans. 
• Asset-based borrowing in which the lender will provide up to 90% of the value of receivables or 80% of inventory pledged as collateral. 
• Secured term-loans for periods up to 2 or 3 years at a maximum. 
• Subordinated loans which are partly secured or unsecured and carry interest rates as high as 18% because of the risk to the lender. 
• Lease financing arrangements that are commonly used for the acquisition of costly machinery and equipment. 
• Contract financing deals i.e. short-term debt financings ranging from $150,000 to $1 million, to enable a supplier of goods or services to finance contracts beyond its current resources. 

Each of these arrangements has a different cost and carries different consequences for the borrower. One of our key functions is to help a client determine the kind of arrangement that is needed and to assist in negotiating a satisfactory loan with a suitable lender. If you'd like to discuss these or other financing alternatives or would like to be introduced to such lenders, please call. 

Each year, when the tax season rolls around, we get a number of new clients who want us to prepare their tax return. Usually, they had been preparing their returns themselves, but the returns became too complicated and they needed professional help. Unfortunately, we find that these taxpayers often made mistakes in the earlier years that led to the overpayment of taxes and the potential for being singled out for audit. Among the more common errors are: 

• - Not taking legitimate deductions, such as a deduction for a home office, for fear that it might trigger an audit. 
• - Failing to deduct tax deductible expenses, especially travel, tolls, tips, taxi and other fares for lack of a receipt. 
• - Losing the interest deduction by using credit card loans and other personal loans instead of home equity loans for purchase of a car or other big ticket item. 
• - Reporting income that does not need to be reported such as tax-exempt income or rental income from a vacation home that's rented less that 14 days per year. 
• - Paying IRS penalty notices out of fear, even if the assessments are incorrect. 
• - Failing to take deductions such as for a charitable contributions because the credit card charges have not been paid until the following year. 

The combination of these mistakes plus a lack of proper tax planning caused these taxpayers to pay considerably more income taxes than was necessary. What's more, usually the extra tax far exceeded the cost of professional tax preparation. Without wishing to sound self-serving, unless you are highly conversant with the tax code, you'll usually come out way ahead with professional help.

Shareholders in a privately-held corporation have a special problem in determining the estate value of their equity interest in the firm. Since fair market value at the date of death is the appropriate valuation to be used for valuing a business interest and the stock of a privately held corporation is not traded on an exchange, determining value can be extremely difficult and may also result in lengthy and costly disputes with the IRS. To avoid these problems, buy-sell agreements and recapitalizations are frequently used. A buy-sell agreement also assures an existing shareholder that upon his or her death, a buyer for the equity interest will be there, and gives surviving shareholders the protection of obtaining a prior right to acquire the deceased's stock. While the sales price established in the buy-sell agreement does not necessarily become the estate tax value at the shareholder's death, it is legally enforceable as the sales price of the equity interest of the deceased. However, if the sales price does not reflect the fair market value of the deceased's equity interest or restrict its sale, the IRS can ignore the agreement in establishing the value of the deceased's equity interest under section 2703 of the Internal Revenue Code. This section is applicable to buy-sell agreements entered into or substantially modified after October 8, 1990. Use of section 2703 can, however, be avoided if: (1) the agreement is a bona-fide business arrangement; (2) it is not a device to transfer stock to a family member for less than fair market value, and (3) the terms of the agreement are comparable to those entered into in an arm's-length transaction. Where the agreement is not between related parties, these tests are presumed to have been met, but certain other requirements still have to be satisfied for the price established by the buy-sell agreement to be recognized for tax purposes. These are, that the agreement must: 

• Establish a reasonable and determinable price for the equity interest;
• Obligate the decedent's estate to sell the interest at the agreement price; 
• Prohibit the lifetime transfer of the interest at a price in excess of the agreement price, and 
• Be a bona-fide business arrangement and not a device to transfer the business interest to a family member for inadequate consideration.

We help may closely-held business owners with tax-planning, design of valuation formulas and other aspects of equity interest transfers intended to provide a smooth business succession, either voluntary or forced, due to ill health or other events. If you have an interest in a closely-held business, you might want to discuss its eventual disposition with us. 

As an aside, we were asked to speak at a seminar co-sponsored by the New Jersey Bar Association and the New Jersey Society of CPAs entitled " Shareholders' Agreements - What You Need To Know". Distributed at the seminar was the 112 point checklist Marty Abo compiled to assist in drafting a well thought out buy-sell agreement which is available to clients and colleagues upon request. 

If you start your own business and it fails, you may only be able to deduct up to $3,000 in losses per year unless you are careful about the way the business is structured. That's because the IRS considers you an investor in the business and only $3,000 in capital losses can be deducted from ordinary income. The simplest solution for avoiding this dilemma is to organize the business as a "pass-through entity" (proprietorship, partnership, S corporation or limited liability company) and not as a regular C corporation. Alternatively, if you find that it is necessary to organize as a regular corporation, qualify the stock you receive as "section 1244 stock." Losses on such stock are deductible up to $100,000 on a joint return against ordinary income. These are just some thoughts to ponder and discuss with your professional tax and financial advisor. 

People with a sudden need for cash often borrow from their 401(k) plan because it's convenient and the interest is low. Our advice: avoid it if at all possible! Your real borrowing cost is not just the interest on the loan, but also the tax deferred investment return you won't earn on the money borrowed. Furthermore, if you leave your employment, the entire loan becomes due. If you can't repay at the time, the money borrowed becomes fully taxable to you and is subject to a 10% excise tax penalty if you are not yet 59 1/2. Clients are encouraged to talk with us concerning the best way of obtaining funding for emergency purposes. 

Sometimes clients who have already made $10,000 in gifts to an individual and used up the annual gift tax exclusion, question whether it makes sense to dispose of additional assets by making taxable gifts. While the answer depends on the circumstances, the nature of the property and a variety of factors, in general, if you are going to be subject to estate taxes anyway, making taxable gifts will probably result in a tax saving. The reason: If you make a taxable gift, the assets are removed from your estate and you won't owe estate taxes on them. If they remain in the estate, and are passed on by bequests, all of the assets including the money used to pay the estate taxes are subject to estate tax, and the rate of tax will probably be higher than had the assets been transferred by gift. You'll also remove the future appreciation of the assets from your estate, avoid the taxes on any income the assets produce, and the gift will avoid eventual probate. Incidentally, there are extensive tax planning possibilities when it comes to gifting that can be utilized to minimize taxes. 

Abo and Company, LLC has increasingly been called upon by the legal profession as well as by the banking and insurance community to provide expert witness testimony, provide business valuations or serve as a financial consultant on a case. 

We have been successful in providing the following services: 

• - Valuation of businesses (corporations, partnerships, sole proprietorships).
• - Assisting attorneys with securing fair property settlements for their clients involved in divorce actions or personal injury claims 
• - Verifying lost profit claims, business interruption and fidelity claims. 
• - Analyzing tax implications of suits and settlements. 
• - Assisting in discovery related to business and tax matters. 
• - Attending depositions and/or preparing witnesses for depositions and trials. 
• - Providing clear and simple testimony and easy-to-understand analysis.
• - Determining whether financial records are relevant in responding to subpoenas. 
• - If the need arises, call us to provide expert witness testimony or financial consultation. 

You should also call our office for copies of the various brochures made available while Marty Abo chaired the Litigation Services Committee of the New Jersey Society of CPAs.