Tax Strategy & Litigation

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Tax Strategy & Litigation

Business tax should be the last thing you consider when evaluating whether to start a business. The taxes you may or may not pay are inconsequential against the potential upside of a successful business. Basically, if future you is complaining about how much your business needs to pay in taxes, then you’re doing great because you aren’t worried about payroll or rent.\

That being said, tax is the last thing you should consider, but it isn’t something that should be ignored. You can and should structure your business to minimize personal liability for business risks and maximize your taxable benefit. The primary way to minimize your taxable burden starts with the entity you choose to incorporate.

LLC v. Corporation

There are two types of taxation: pass-through and corporate. Pass-through taxes are applied once, while corporate taxes are applied twice.

Pass-through taxation applies to all businesses that aren’t corporations, e.g., partnerships, single-member LLCs, and sole proprietorships. Pass-through taxation means that the taxable burden flows through the company to the individual equity-holders.

If the company isn’t incorporated or is a single-member LLC, then the federal tax issues are reported on the owner’s Schedule C (and supporting schedules as needed). If the company is a partnership or multi-member LLC, then the taxes are reported on individual K-1 forms based on each partners’ relative equity position (copies of which are sent to the IRS, but you still need to report it on your individual tax return, yes, I know our federal tax system has a lot of redundancy). The K-1 is then reported on your individual tax return.

Corporate tax means that the business pays an income tax, and the shareholder pays another tax on any profits distributed as dividends. You have probably read this as “double-taxation” at some point. The same income is subject to tax twice.

You may be wondering, why would anyone incorporate a corporation? In most situations, an LLC is the best vehicle to minimize your taxable burden while still enjoying limited liability protections. However, in some circumstances, a corporation is necessary. For example, banks or financing companies usually have to be corporations. If you anticipate soliciting venture capital interest, most VCs will require your business to be a corporation and incorporated in Delaware.

Tax Litigation

Tax litigation refers to audits and civil suits filed by federal, state, and local agencies to ascertain if your business has paid the appropriate tax. Litigation can proceed in administrative or judicial courts. It can be for any of the various taxes your business may owe from income to sin taxes or for a tax credit your business took on a prior return. The penalties your business faces can range from interest and additional fees to personal liability or even prison for the worst offenders.

In general, most tax litigation issues can be resolved informally at the audit or investigatory phase. However, it requires cooperating and compliance with the Revenue Officer. In some rare circumstances, you may be presented with a genuinely unresolved tax issue that may require extensive litigation.

However, having a just cause and making a sound business call isn’t always the same thing. I give my clients legal advice within the context of cost-benefit analyses. A particular case could be just to litigate, but is it worth the cost and distraction from growing your business? I am client-oriented in the advice and representation I give to my clients.

Contact a trusted California attorney today

At the Law Office of Bryson Woulfe, I assist non-profits in a variety of ways. Call my San Diego office today at 619-607-3417 or contact me online to schedule your consultation.