Don't try this at home

Sometimes small businessmen must feel that they shouldn't so much as go to the bathroom without checking in with their professionals.  No, you don't have to raise your hand, just go.

But sometimes you should call your tax guy.   Anything involving the ownership of your business is one of those times. 

An old friend called sometime back and told me he had put the ownership of his business in an S corporation.  And it's doing great, it really has increased in value, and it generated enough funds that he had his corporation invest in another venture.  Oh, and he gave an ownership interest in his corporation to a principal in that new venture.  What did he have to do to make sure that the co-owner didn't get any income from the old venture?

Short answer: it was too late.  Longer and more expensive answer: he has to undo what he did and restructure the ownership of his company, possibly incurring taxable gain to himself or his co-venturer. 

Sadly, it would have been easy to achieve my friend's goals by doing things right in the first place, either by having the S corporation make a tax-free distribution of funds for the new venture, or by structuring the new venture as a partnership with the co-owner as a partner.  But once the paperwork for the old corporation has been signed and checks have been cashed, suddenly there is potential tax all over the place when you try to undo it.

The moral?  When you mess with the ownership of your business, it's a lot cheaper to call a good business lawyer and a tax guy before you do the deal; it costs a lot more to repair a deal than to do it right in the first place.

Comments

[Rush Nigut]

Well said. So many times I have seen business people try to save a buck and in the end spend more fixing a situation than it would have cost to do it right the first time. An ounce of prevention is worth a pound of cure.