Faulty Framework?

The question posed above is not intended to be rhetorical. Rather, it is one that the owners of a closely held business should consider thoroughly before transferring or committing any business assets to a charitable organization.

Losses Weren’t Always Bad

Most tax advisers are aware that, prior to the Tax Reform Act of 1986 (the “TRA”),[i] the Code placed few limitations on the ability of an individual taxpayer to use deductions from a particular activity to offset income from other activities.

What Was Intended?

Transactions between commonly controlled, closely held businesses are often conducted in an informal manner. This is unfortunate because, in the absence of documentation, it is sometimes difficult to discern the parties’ intent with respect to a transaction. This may be especially troublesome for the businesses and their owners where the transaction purports to create a debtor-creditor relationship.

Another Change

Last week BDO confirmed that it was going to convert from an entity organized as a limited liability partnership under state law to one organized as a corporation.

With that, BDO became the latest in a growing list of highly regarded accounting firms to announce that it was going to change, or was considering a change in, its legal structure.  

Decisions

It is often the case that the optimal form of legal entity through which a business should operate, at least for income tax purposes, will depend in part upon the stage of its life cycle[i] in which the business finds itself.  

For example, a start-up that is expected to generate losses during its initial years of operation may want to pass those losses along to those of its owners who have made significant capital contributions to the business.