When you hear news of possible corporate tax rate increases, your first thought may be how this will hurt your company’s bottom line. In addition to concerns about reduced profits, you might wonder how changes in taxation laws affect stock market prices. In many cases, stock prices go up after a federal tax increase. Still, many worry about what will happen if the economy stalls.
Business owners do not have much influence over tax laws. They do have choices about reducing their tax burden. For example, selling stocks is taxable. Smart stockholders know the ins and outs of capital gains, tax credits, and taxes on dividends. Knowledge of tax laws related to the sale of stocks is especially important for those looking to sell their businesses.
The History of Taxation Laws Affecting Stock Market Prices
President Joe Biden’s 2024 budget proposal includes an increase in the corporate income tax from 21% to 28%. Although the proposed tax hike is sizable, if passed the corporate tax rate will still be lower than the top rate of 35% corporations paid before 2018. Congress is unlikely to approve new corporate tax laws, but the president’s proposal has reignited dialogue on corporate tax rates.
The last corporate tax hike was in 1993, when the government raised the rate from 34% to 35%. The tax rate stayed the same until Congress passed the 2017 Tax Cuts and Jobs Act and lowered the corporate tax rate to the current 21%. Most corporations and their taxation law experts find ways to pay the government less than the statutory tax rate. The effective federal tax rate for large corporations decreased from 16% in 2014 to just 9% a year after the 2017 tax cuts.
Despite what one would think, markets have had strong returns following tax increases over the past 50 years. Fidelity compared tax increases with stock market trends from 1950-2021. The study included corporate, personal, and capital gains tax increases. Key findings include:
- The S&P 500 index had higher than average returns after tax increases 13 times.
- Stocks rose every time the corporate tax rate increased.
The study’s findings are interesting, but Fidelity does not have enough information to draw a conclusion about how taxation laws affect stock market prices. When corporate taxes have increased and stock prices also went up, the economy might have been stimulated by factors such as job growth, defense spending, or low interest rates. The added sales revenue from a booming economy often give companies what they need to counter higher taxes and come out ahead.
Selling Stocks Is Taxable Under Capital Gains Laws
While you cannot affect stock market prices or tax increases, you can reduce your tax liability related to selling stocks or your business. The Internal Revenue Service levies capital gains taxes when you sell stocks:
- Long-term capital gains taxes apply to the sale of assets when you have owned a business for one or more years. Long-term capital gains have lower tax rates than other sources of income. The three tax rates are income-based: 0%, 15%, or 20%.
- Capital gains for businesses less than one year old are taxed at ordinary income tax levels.
To figure the taxable gain of the sale of your pass-through entity, subtract the seller’s basis from the purchase price. The proceeds will be taxed as capital gains.
Tax Laws Related to Selling a Business
Before getting serious about the potential sale of your business, find out how the structure of a sale will affect both your federal and state taxes. Failure to structure the sale properly may have a significant impact on your tax bill, and hence on your retirement fund.
The sale of a business usually is classified as a long-term capital gain for which the seller is responsible. The long-term nature of the gain adds up. If you started your business 15 years ago with $75,000 and are selling it for $5 million, your capital gain is $4.25 million. In this example, a federal capital gains tax at a 20% rate is $850,000.
Businesses may be sold in one of two ways: As a stock offering or a sale of assets. Most sellers prefer stock sales while buyers want to buy the assets. The seller will pay capital gains taxes.
Strategies for reducing taxes when selling stock differ by corporate structure. The owners of pass-through entities—Limited Liability Companies (LLC), partnerships, or S Corporations—usually sell their personal stock shares to transfer the company to a new owner. They pay capital gains taxes on their personal income taxes and the company does not owe additional taxes.
A buyer may be adamant about buying the assets of a pass-through entity, not stock, because of the tax advantages for them. The seller can go ahead and sell the assets and not worry about paying any taxes beyond capital gains.
In contrast, selling assets instead of stock has negative consequences for owners of C Corporations. When a company sells its assets, it must pay taxes at both the corporate and shareholder level. If the shareholders sell their stock, they receive a direct payment and pay capital gains tax. Sellers often need help from a taxation attorney to negotiate with buyers for the deal that is in their best interest.
Taxation Attorneys Help Business Owners Cut Their Tax Burden
If you are planning to sell your business, ask for advice from taxation attorney Christopher Swiecicki. He helps business owners design an exit strategy with the lowest tax burden possible. Some tactics Christopher recommends include:
- Spread out your tax liability. You can ask the buyer to pay in installments to eliminate your need to pay all the capital gains taxes in one year.
- Watch the calendar. Do not sell a business before it is at least a year old to benefit from the lower rates of capital gains taxes.
- Do not rush into a sale. Negotiate with confidence when the buyer wants to make a deal that works for them but not you. Take your time and stand your ground.
- Reinvest in the Opportunity Zone Fund. You can defer capital gains tax through December 31, 2026, by investing capital gains from the sale of a business into an Opportunity Zone, a federal economic development program. The investment must be made within six months of the capital gains.
Selling your business may be the largest financial transaction you will ever make. Feel confident you are structuring the sale to minimize capital gains taxes with help from taxation attorney Christopher Swiecicki. Call our office at (636) 778-0209 to arrange a free consultation.
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As a small business owner, one of your long term goals could be to sell your business, or acquire another one to expand your reach. Either way, it’s a big decision, and understanding the different ways companies can combine with each other will give you more options and a greater understanding of the potential outcomes.
There are four main types of business combinations: Mergers, amalgamations, acquisitions, and takeovers. Each one serves a different strategic outcome, and only you can decide which one is ultimately the best match for your goals.
A merger is a strategic move where two or more companies combine resources and operations to create a new entity. A merger is usually a mutually agreed-upon decision to expand market reach, diversify product lines, or enhance operational efficiency.
Mergers represent strategic decisions businesses make for a variety of reasons. At their core, mergers are about growth and consolidation. They provide an opportunity for companies to expand their market reach, gain competitive advantages, and increase their market share. Unifying resources, talent, and operations between the merging entities achieves this.
One of the key reasons why a company might opt for a merger is to expand into new geographical areas. Suppose a company is seeking to grow its business in a specific region. In that case, it may merge with another company already operating in that area. This allows the merging company to leverage the local market knowledge, presence, and customer base of the existing company, thus facilitating a smoother and more effective expansion. Another significant motivation for pursuing a merger could be preventing an unprofitable business’s closure. If a company struggles financially, merging with a healthier company could infuse it with the necessary resources and stability to turn its fortunes around. This saves the company from potential bankruptcy and helps preserve jobs that might otherwise be lost. Additionally, mergers can lead to cost efficiencies through economies of scale. By consolidating operations, companies can eliminate duplicate departments or functions, saving costs. This could result in lower customer prices and increased profitability for the newly merged company.
A merger or acquisition is a complex legal process. It starts with evaluating the economic value of the deal, followed by meeting statutory requirements, drafting legal documentation, and conducting due diligence. After the merger, the focus shifts to effective integration management. A merger and acquisition attorney is critical to the process, offering high-quality advice, risk mitigation, and negotiation skills.
An amalgamation is similar to a merger but usually involves more than two companies. In an amalgamation, multiple companies combine to form an entirely new company. The existing companies cease to exist, and the new entity takes over their assets and liabilities. This strategy is often adopted to achieve more significant economies of scale or to consolidate resources. None of the combining companies survive as independent legal entities in an amalgamation. Instead, they dissolve and form an entirely new company.
Amalgamations can streamline operations, reduce overhead costs, and improve financial performance. For instance, the combined entity can eliminate duplicate departments or functions, resulting in operational efficiencies and cost savings. From a legal perspective, an amalgamation involves due diligence to inspect all aspects of the target companies, from operations to intellectual property.
The process also requires compliance with statutory requirements, which vary depending on the size and sector of the firms. The amalgamation is formalized through a legal contract, and a critical phase post-amalgamation is managing the integration of the companies.
In an acquisition, one company (the acquirer) purchases another company (the acquiree). The acquirer takes control of the acquired company, which becomes part of the acquirer’s business, and the acquiree’s identity ceases to exist. This strategy stimulates growth, gains competitive advantages, or increases market share, giving the acquirer a greater presence and influence in its industry. There are several compelling reasons why a business might want to pursue an acquisition. One key motivation is to improve the performance of the target company. The acquirer may identify opportunities to significantly reduce costs, improve margins, and enhance cash flows within the target company.
As mentioned, an acquisition is when one company buys most, if not all, of another company’s ownership stakes to take control. From a legal perspective, this involves a series of steps. A thorough analysis of the economic value of the deal is undertaken. If the value is positive, the buyer proceeds to meet any statutory requirements that may apply, depending on the size and sector of the company being acquired. The acquisition also necessitates conducting financial and legal due diligence to reveal relevant information for the buyer. This process involves the seller providing all supporting documents and answering a due diligence questionnaire. The transaction is formalized through legal documents, often a sale and purchase agreement.
A takeover is a type of acquisition that can be friendly or hostile. In a friendly takeover, the target company’s management supports the transaction. However, in a hostile takeover, the acquiring company pursues the purchase despite opposition from the target company’s management or board of directors.
A takeover occurs when an acquiring company aims to assume control of a target company, typically by purchasing a majority stake. The process often involves making a bid for the target company’s shares. If the takeover is successful, the acquiring company gains control over the target company and its resources, which can significantly impact its market position. There are several strategic reasons why a business might want to pursue a takeover. For instance, if a company’s existing products are in the later stages of their life cycles, it may be challenging to achieve organic growth. In such cases, a takeover allows for the acquisition of new products or services and the expansion of the business portfolio. A takeover is a legal process in which one company acquires control of another by purchasing most of its stock. From a legal standpoint, this involves careful due diligence, which is a thorough investigation of all aspects of the target company.
It’s also crucial to comply with any statutory requirements related to the specific industry or size of the firms involved. The takeover is formalized via legal documents, often a sale and purchase agreement, if a single entity owns the target.
Differences Among These Business Combinations
While all these terms represent ways of combining businesses, their processes, strategies, and outcomes differ. In mergers and amalgamations, the companies involved typically have a mutual agreement and shared objectives. The resultant company is a blend of merging entities, which often cease to exist in their original form.
By contrast, in acquisitions and takeovers, the identity of the acquiring company usually remains while the acquired company gets absorbed. The key difference between an acquisition and a takeover is the level of agreement from the target company, with takeovers potentially being done against the wishes of the target’s leadership. Each business combination has its own legal, financial, and operational implications. Ultimately, the best route to take would depend on the specific circumstances of the business and the owner’s strategic objectives. It would be advisable for a business owner to consult with a financial advisor or business consultant to understand the best options for their specific situation.
As a business law firm, we’re here to guide you through these complex processes and help ensure your business transition is as smooth and advantageous as possible. Contact us to discuss your options and embark on this pivotal business journey with confidence.
When starting a business, few owners expect to end up facing a lawsuit. But at some point during the life of the company, they may end up on either side of a legal dispute This could be with another business, customers, suppliers, lenders, employees, or a government entity. It can also be between the company’s business partners. These circumstances all call for legal help.
What does a business litigation attorney do for companies? They represent those facing legal challenges, negotiating and settling conflicts or litigating the cases in court. In addition, consulting with a business litigation lawyer before problems arise can often help a company avoid disputes altogether or at least reduce their impact.
Some businesses have in-house legal counsel to handle litigation issues. Others hire a law firm when there is a clear need for legal guidance. A third option is adding a business litigation attorney to your team on retainer. Gaining a deeper understanding of the services litigation attorneys provide will help business owners know if and when to find one.
Situations That Call for a Business Litigation Attorney
Owners of small and medium-sized businesses may never need a business litigation attorney. Instead, they accomplish simple legal tasks like obtaining licenses, permits, and an employer identification number (EIN) with a bit of research. Even navigating an Internal Revenue Service audit is possible with the company’s accountant rather than legal counsel.
If circumstances threaten business interests in some way, or if there is a good chance that a situation may turn litigious, a business litigation attorney is a must. A lawyer in this role can defend the company’s rights if they are under attack. If the business litigation attorney’s client is the entity that has been wronged, counsel can see that it is made whole.
These are the most common issues that call for a business litigation attorney:
Companies may face breach of contract issues or disagreements about how to interpret a contract’s language that necessitate the help of a business litigation attorney. Contracts may involve explicit instructions, like a stock purchase agreement in a merger or acquisition, or something less concrete such as the implied covenant of good faith and fair dealing. The attorney may negotiate with the other party on behalf of the company or represent it if the matter ends up in court.
Human resource issues sometimes escalate to the point of litigation. A company may need a business attorney to defend against a former or current employee for wrongful termination, complaints regarding pay or working conditions, or claims of discrimination, sexual harassment, or a hostile work environment.
Disagreements between business partners sometimes turn contentious. A business litigation attorney can help resolve the situation and keep the partnership intact, or advise the parties on dissolving the partnership. Issues may also arise in public entities between shareholders and management about corporate control or the direction of the company. An attorney may be called upon to intervene.
Someone is Suing Your Business
A company can become the subject of a lawsuit for any number of reasons including:
- Product liability/class action suits
- Real estate disputes
- Intellectual property or patent infringement
- Breach of contract
Working toward a settlement or if necessary, going to court in one of these instances, is one of the most common reasons a company would hire a business litigation attorney.
You Need to Initiate a Lawsuit
Just as an entity may be sued for the reasons above, it may also find itself as the plaintiff in one of these same cases. Perhaps a competitor is ripping off a product design.
When it becomes necessary to file a claim or initiate a lawsuit against an individual or another company, owners will need an experienced business litigation attorney.
Facing an Investigation By a Government Entity
Business litigation attorneys also represent companies in complaints or investigations brought by the federal, state, or local government. These cases can include compliance issues, a corporate mishap or disaster, or tax liability issues with the IRS.
The Role of Business Litigation Lawyers
For many companies, dealings with business litigation attorneys are largely preemptive. Owners or managers consult with lawyers to draft contracts, write policies, and make decisions with the specific goal of not ending up in litigation. For example, a company will hire a merger and acquisition attorney to structure a deal so the transaction goes smoothly.
When things turn litigious, a business litigation attorney helps negotiate a settlement that is acceptable to both parties. A lawyer may also advise their client through Alternative Dispute Resolution (ADR) procedures. The process of ADR can take the form of arbitration, where a judge decides a dispute for the parties, or mediation, where the parties come to their own agreement.
If the dispute ends up in court, what a business litigation attorney does is the same as what any other courtroom lawyer does. They prepare briefs, present motions, find and interview witnesses and experts, and present evidence. They will argue the case and defend their client in front of a judge and jury during trial.
Do You Need a Litigation Attorney on Retainer?
Companies and industries that are vulnerable to litigation often employ full-time litigation attorneys. For example, utility companies with thousands of employees and customers, and strict government regulation, have in-house legal departments.
Other companies may only hire a litigation attorney if and when they need one. Or, they may have a consulting relationship with a law firm or independent attorney for issues as they arise. In some cases, companies with in-house counsel work with an outside litigation attorney with specific litigation experience, leaving their corporate team to deal with day-to-day legal issues.
Whether a company has a legal department or hires an attorney on an ad hoc basis is often a matter of cost. Owners must ask themselves about the likelihood of ever needing legal representation. Some may never need a business litigation attorney. But if they do anticipate the need, and are weighing whether to have an attorney on retainer, they must weigh what a business litiation attorney does with being under-represented in what could become a very costly lawsuit.
What to Look For In a Business Litigation Attorney
Perhaps you will never need a business litigation attorney, but it is best to consider the possibility. At Swiecicki and Muskett , we have met many business owners who never imagined they would be sued or need to file a lawsuit to protect their business interests. This is why we suggest being proactive.
Find and form a consulting relationship with an attorney that you trust. Even if only called upon occasionally, they will be able to provide expert legal guidance. Their assistance with business basics like drawing up legally binding contracts and writing clear and compliant business policies will help you avoid unsettling legal disputes.
Even if your lawyer is not a business litigation attorney, or does not have experience relevant to your situation, they can refer you to someone they trust in the event that litigation expertise is needed. When interviewing litigation lawyers, look for superb writing and negotiating skills. Assess whether they can display the confidence in court necessary to argue your case effectively. And of course, they must be well-versed in state and federal statutes, case law, and legal precedents.
If you have questions about business litigation, schedule a consultation with Swiecicki and Muskett. We’ll discuss how best to protect your business interests and preserve what you’ve worked so hard to build.
Founders set up LLCs and other corporations to protect themselves from personal legal liability. The personal assets of members of an LLC are separate from their business assets. However, courts sometimes end the limited liability protection for owners, directors, and shareholders, an action called the lifting the corporate veil or piercing the corporate veil.
“Veil” refers to the protection from legal liability provided by LLCs and corporations. When a court lifts the corporate veil, it removes the shareholders’ protection from legal liability. Their personal assets will be included in any orders to repay creditors and other litigants.
Owners, directors, and shareholders need to do all they can to protect themselves from a court piercing the corporate veil—and the personal consequences that follow.
When Do Courts Lift the Corporate Veil?
Courts use caution when considering lifting the corporate veil because the principle of limited liability is a key part of corporate law. However, in cases where there is straightforward evidence of an egregious act of misconduct, courts are willing to pierce the corporate veil and impose personal liability. The misconduct may include fraud, wrongdoing, or abuse of the corporate form. In Missouri and in most other states, three factors must be present for a judge to pierce the corporate veil:
- The owner dominated finance, policy, and business practices around a transaction and the corporate entity did not have a “separate mind.”
- The owner’s control was used to defraud, violate a statute or other legal duty, or commit a dishonest or unjust act that hurt the plaintiff.
- The control is believed to have caused the injury or loss.
A Missouri appeals court reaffirmed the three requirements for lifting the corporate veil in a 2014 case, Hibbs v. Berger.
Can Minority Members Ask Courts to Pierce the Corporate Veil?
The Hibbs ruling is also known for the court’s decision on whether minority members may file claims against majority owners. Plaintiff Steve Hibbs claimed that Brian Berger, his former employer, owed him money. Hibbs owned 5% of one of Berger’s businesses. When the company started having money problems, Hibbs stopped getting paid.
The Missouri Court of Appeals ruled Hibbs, a minority member of an LLC, had a right to pierce the corporate veil. Then, the court considered whether the case met the three requirements for removing the protection offered by an LLC. The court decided there was not enough evidence to pierce the corporate veil.
Examples of Courts Piercing the Corporate Veil
Two high-profile examples of a court piercing the corporate veil took place in Florida:
- In Ocala Breeders’ Sales v. Hialeah, Inc., the court lifted the corporate veil to investigate reports of the corporate officers of Hialeah, Inc., unlawfully running a subsidiary. The look behind the corporate veil revealed the subsidiary was no more than an instrument of the parent company. Hialeah, Inc., did not have enough capital and thus could not meet its obligations.
- In Broward Marine, Inc. v. S/V Zeus, the court lifted the veil of a yacht company to reveal the dominant shareholder’s evasive moves to avoid paying the plaintiff the money he owed him. The court found the defendant transferred all the company’s assets to another business he owned and hid the transaction. A judge ruled the dominant shareholder and his other company both were liable for the debt.
Florida courts followed the same guidelines for piercing the corporate veil as Missouri courts do.
Bad Business Practices Leading to Lifting the Corporate Veil
Courts are more likely to strip protection from legal liability–pierce the corporate veil–of companies guilty of one or more of these bad business practices:
- Commingling funds. When members of an LLC do not keep their own money separate from their business funds, they risk losing protection from legal liability. In the view of the courts, a business owner who does not treat their business as a separate entity does not qualify for limited liability protection.
- Sharing assets. Owners of LLCs who own more than one business need to keep separate financial records and lists of assets for each business. For example, if they list an expensive piece of equipment as an asset for one business, they cannot list the same equipment on their other business’s Schedule C.
- Illegal activities. If a corporation is used as a vehicle to defraud creditors, shareholders, or other third parties, a court may disregard the corporate form and hold the individuals responsible for the corporation’s actions. This can occur when the corporation is used to conceal illegal activities or to evade legal obligations.
- Lack of corporate formalities or recordkeeping. Corporations must follow certain formalities such as holding regular meetings and tracking finances. They also must keep a clear separation between the corporation and its owners.
- Undercapitalization. The courts consider whether a business is undercapitalized when a creditor or other litigator asks for lifting of the corporate veil. The court wants to know whether the business has enough money to run. If the court decides the LLC or other business entity is undercapitalized, it is more likely to pierce the corporate veil.
How to Avoid Piercing of the Corporate Veil and Personal Legal Liability
If you ever face piercing the corporate veil, you will have a better chance of convincing a court you keep your business and personal assets separate by adhering to best practices:
- Follow formalities for your business structure. Corporations need to have annual meetings, file reports, and more. LLCs and LLPs need to file reports to the state, have operating agreements, and keep records of votes on big decisions.
- Save business documents for at least seven years. When you do this, you can prove you run your business following the law.
- Have separate business and personal accounts at the bank and for other accounts.
- Capitalize your business to the extent you can always pay your bills, employees, and contractors.
- Use your business name on everything including contracts, signage, business cards, and other official documents.
Corporate lawyers have advice specific for maintaining the veil for different industries and fields. Whether you are starting a business or tweaking an existing corporate structure, a conversation with an experienced corporate attorney is a valuable use of your time. Swiecicki and Muskett, LLC, advises business owners and corporate leaders based on decades of legal experience. Contact us today if you have any questions about piercing the corporate veil!
When a larger company tried to take over the company owning the St. Louis Post-Dispatch in 2022, corporate lawyers showed Lee Enterprises how to fight back. They crafted a poison pill defense, or shareholders rights plan, to kill the unsolicited offer from Alden Global Capital. The defense worked, and Lee still owns the Post-Dispatch and 22 other papers.
Corporate lawyers often recommend poison pills for defense against corporate raiders. Sometimes the acquirer backs off. Other times, the targeted company and the acquirer reach a favorable agreement.
How Do Poison Pills, Shareholder Rights Plans, Work?
Poison pills reduce the appeal of a takeover by either making the deal too expensive for the bidder or by creating negative side-effects of a takeover.
As corporate raiders begin buying up shares, corporate lawyers work closely with the targeted company to determine the specifics of the poison pill and when to launch it. For example, a board may stipulate that a shareholders rights plan take effect when the acquiring entity gains 20% of the company’s shares.
Most shareholders rights plans include a stipulation that they can be changed or negated by the board. Thus, the board is forcing the acquirer to negotiate directly with them, which will have a positive position for bargaining.
Corporate lawyers use a variety of ways to launch poison pills including:
- Preferred stock plan: A company issues a dividend of preferred stock to shareholders. These shareholders may use special voting rights when a company tries to takeover by buying a large quantity of shares.
- Flip-in: Many companies include a provision in their charter or bylaws establishing a threshold for buying stock. Before the acquiring entity nears the ceiling, usually between 20 and 50%, the targeted company starts selling stock at a discount to its existing shareholders. This dilution of the company’s stock may prevent the hostile takeover.
- Flip-over: When a company employed a flip-in poison pill and was not able to avoid a hostile takeover, there is another defense mechanism to try: A flip-over poison pill. The shareholders of the targeted company buy up stock at a discount. In doing so, they dilute the shares of the acquiring company’s existing shareholders. This is only possible if a section of the bylaws spells out the legality of the maneuver.
- Back-end plan (also known as a note purchase rights plan): A back-end plan gives shareholders of the targeted company the opportunity to exchange their stock for either cash or other securities at a higher value if the acquiring company gains a majority of the company stock. This strategy may diminish the acquiring company’s interest in purchasing the existing shareholders’ stock.
- Golden handcuffs: Corporate lawyers also may recommend a golden handcuffs poison pill. Many executives have lucrative deals rewarding them when they hit goals and/or stay with the company for a certain period. The “handcuffs” often include deferred compensation and employee stock options. A golden handcuffs poison pill defense removes the vesting and performance requirements. Then, the executives may cash out and leave the company. This often makes the target less desirable to the acquirer who need the executives to lead the company after they take over.
Pros and Cons of Poison Pill Defense Strategies
The ultimate success of a poison pill defense strategy reveals itself years down the road. Boards will consider whether the goals of both companies were met and whether they are still being met when analyzing the success of the shareholders rights plan.
For many companies, the poison pill is a negotiation tactic that succeeds in either 1) preventing a hostile takeover or 2) laying the foundation for a favorable merger. While developing the shareholder rights plan, or poison pill, the company finds a way to dictate the terms of the takeover. The poison pill’s benefits may include:
- The targeted company identifies potential acquisitions.
- Higher premiums for shareholders.
- Slowing the speed of a corporate raid.
In the short term, a poison pill can hurt the valuation of many shares. The decrease in value will affect the company’s constituencies in different ways:
- Shareholders may receive a financial loss when the value of their shares declines.
- Corporate executives who also own part of the company may or may not lose their position, power, or money during a takeover.
- Lower and mid-level employees may be laid off.
Corporate Lawyers Guide Companies Threatened by a Takeover
If another company is positioning itself to get majority ownership in your company, contact the Swiecicki-Muskett law firm. Managing partner Christopher Swiecicki will guide you in developing a poison pill, or another strategy, to lead your company through a hostile takeover proactively and cost-effectively.
Christopher developed his expertise in corporate law as both in-house and outside legal counsel. Today, he provides senior-level counsel to C-suite executives, in-house legal teams, and business owners. He is on the faculty of Washington University in St. Louis School of Law where he teaches business acquisitions (M&A) courses.
Contact the Swiecicki-Muskett law firm at 636-778-0209 or email Chris@SwiecickiLaw.com.
Merger and acquisition lawyers help companies that are at a crossroads. They facilitate deals and advise owners who are looking to sell their business, buy another business, or combine assets and resources to create a new entity.
The merger and acquisition (M&A) branch of law brings together multiple disciplines, including accounting, tax law, real estate, government and industry regulations, and more. M&A lawyers must have a diverse skill set (or the ability to assemble a team of people with the appropriate expertise) to handle all of a transaction’s moving parts.
When Should a Business Hire a Merger and Acquisition Lawyer?
Buying or selling a company, or merging with another one, is not something that a business owner should attempt on their own. Even their corporate counsel might not be equipped to handle the transaction. An attorney with merger and acquisition expertise is necessary, and it’s a good idea to get them on board as soon in the process as possible.
The following scenarios will trigger the need for a merger and acquisition lawyer:
- Some small business owners grow their companies with the specific goal of one day striking a lucrative deal to sell it to a larger entity. They should consult with a good attorney early to ensure that their company, and their own compensation, is structured appropriately.
- Whether or not it was planned, potential buyers may start to show interest in a company. Consulting with a merger and acquisition lawyer can be helpful to assess the options, and whether or not it makes sense to entertain offers at all at that particular time. They can also advise on “poison pill” options to prevent hostile takeovers.
- Hiring a merger and acquisition lawyer is a good idea during succession planning if there is no plan to pass the company on to heirs or partners. The attorney can get the ball rolling to find potential buyers.
- When a company finds itself ready to expand and add to its portfolio by acquiring another business, a merger and acquisition lawyer can get the necessary resources lined up and begin to search for suitable candidates.
- A competitor or a company that fits well with a business may go on the market. A merger and acquisition lawyer can structure a viable offer.
Regardless of the circumstances of a sale, purchase, or absorption of a company, it is best to have an M&A lawyer at the earliest stages of the deal. Ideally, they should be the ones obtaining a valuation and crafting the agreement. These transactions are complex and have both internal and external consequences for all of the entities involved. Waiting until a deal is on the table and contracts are already drafted is too late.
M&A Attorney Responsibilities—The Basics
A merger and acquisition lawyer’s job is to advise and negotiate for their client. Throughout the course of the transaction, they will draft and file agreements that pertain to the business assets, employees, debt, and stock. The attorney will work with various accountants, real estate brokers, bankers, and opposing counsel as needed to set up the deal and see it through to completion.
First and foremost, M&A attorneys need to understand their client’s business objectives in order to craft a transaction that benefits the owners, stockholders, and employees. They will map out steps and a timeframe (which typically will take several months) and keep their client informed of the status and progress of the case.
Once the merger or acquisition is complete, the attorney will help to set up any new entities and continue to guide their client as they carry out the integration of assets, staff, and policies.
When the client is the target of a merger or acquisition, the M&A attorney will review the offer and help the company decide whether to accept it, refuse it, or negotiate further.
Skills That Merger and Acquisition Lawyers Bring to the Table
Lawyers who specialize in mergers and acquisitions must wear many hats and understand a wide array of legal and business accounting topics. Those who routinely work in multiple disciplines can offer their clients the level of expertise necessary to reach the best outcome. Swiecicki & Muskett Attorneys at Law, for example, combine the practice areas of corporate law, taxation, and contract negotiations.
This type of multi-faceted firm can tackle the necessary parts of a corporate merger or acquisition. Whether these services are performed by the firm or outsourced, a skilled M&A lawyer is able to interpret the information and how it affects the proceedings.
Accounting and Business Valuation. Knowing what a company is worth through a business valuation is an essential part of any merger or acquisition. In addition, mergers and acquisitions require expert analysis of financial records and tax returns.
Tax Implications. Buying or selling a company can have a big impact on tax liability. It is necessary to understand the transaction’s tax implications and structure the deal accordingly.
Regulatory Obstacles. Government or industry regulations can prevent a merger or acquisition from moving forward. Antitrust, security, and investment laws are just some of the things that a merger and acquisition lawyer will need to navigate, to make sure their clients are in compliance.
Real Estate. The purchase or sale of a business can include the transfer of land, buildings, and other assets. Knowledge of real estate law and property valuations will help this part of the deal go smoothly.
Intellectual Property. Merger and acquisition contracts need to be clear about who owns or holds the rights to intellectual property. Placing a value on these items is important too.
3rd Party Contracts. Quite often, a company has contracts with lenders and other parties. An M&A attorney can obtain the necessary consent from those entities and deal with their concerns about how the business relationships will be affected by the transaction.
Human Resources. A merger and acquisition lawyer can make sure the agreements adhere to any applicable employment, compensation, and benefits laws. They will handle how various aspects are treated, such as payouts, employee stock options, retention agreements, terminations, and consolidation of offices.
Negotiations. A large part of the merger and acquisitions lawyer’s role is negotiating all aspects of the agreement between the entities. This can include the sales price, terms and payments, and any of the other items on this list.
Due Diligence. One of the most important jobs of a merger and acquisition lawyer is conducting due diligence. Private companies are not under the same scrutiny as publicly held ones, so this means conducting an in-depth investigation into the other company to ensure that things are as they claim. They will study their financial statements and other corporate documents, and assess the company’s obligations, litigation risks, and potential growth, among other things. They will look for evidence of sandbagging and ensure that everyone is holding to the implied covenant of good faith and fair dealing.
Finding the Right Merger and Acquisition Lawyer
When a company embarks on a merger or acquisition, it will need representation who can ensure that they meet the intended goals of the transaction. The terms should be clear to all entities and result in a legally binding agreement and a smooth transition for all involved.
At Swiecicki & Muskett, LLC, you will find relevant legal expertise with the breadth of knowledge necessary for a purchase, sale, or consolidation of companies. The firm’s unique combination of practice areas brings more to the negotiating table than the typical corporate counsel. In fact, Christopher Swiecicki teaches Business Acquisitions (M&A) and Corporations as an adjunct professor at Washington University School of Law.
Find out how Swiecicki & Muskett, LLC can help you navigate your merger or acquisition.
Investing in emerging fields like tech and software can have enormous tax advantages. When entrepreneurs sell their businesses, they may be able to exclude up to 100% of capital gain under Section 1202—up to $10 million or 10 times their investment, whichever is more. Both founders and their investors qualify for the exclusion after they have owned the company for five or more years.
If you want to position yourself for the Section 1202 gain exclusion when you sell your business, you may need to change the structure of your business to make an easy sale.
Requirements for Claiming a Section 1202 Gain Exclusion
When selling a business or stock, having the wrong structure can be incredibly costly. For example, selling a business after changing the organizational structure from a C Corporation to a trust disqualifies the seller from the Section 1202 gain exclusion.
To qualify for the exclusion, a small business must meet the following requirements:
- Its aggregate gross assets did not exceed $50 million at any time on or after August 10,1993, and before the issuance.
- Its aggregate gross assets do not exceed $50 million after the issuance.
- It is a U.S. C Corporation and will continue to be so when its stock transfers to a buyer.
- The owner bought its stock with cash, property, or services.
- Its stock must be stock as defined in the federal income tax code. Non-vested stock, stock options, and warrants are not Q.S.B.S.
While corporate stockholders are ineligible for Section 1202’s gain exclusion, stockholders of other business entities may qualify for the gain exclusion. This includes individuals, trusts, and pass-through entities.
Which Business Investments Qualify for Capital Gain Exclusions?
The capital gain exclusions in Section 1202 were designed to stimulate the economy. Thus, qualified trades or businesses are those creating jobs and/or knowledge including manufacturing, technology, research and development, and software.
Investments in service industries are not qualifying stock purchases. Section 1202 lists the following fields as not qualified for the capital gain exclusions:
A. Accounting, actuarial science, athletics, brokerage services, consulting, engineering, financial services, health, law, performing arts, or any other profession in which the main asset is the reputation or skill of employees.
B. Banking, financing, insurance, investing, or other financial services.
D. Oil and gas production covered under Section 613 or 613A.
E. Operation of hotels, motels, restaurants, or similar businesses.
In addition, property management is not a qualified business (Section 1202(e)(7)).
When you are structuring a business for easy sale and positioning yourself for capital gain exclusions, stay focused on its qualifying mission. You need to invest at least 80% of the corporation’s assets (by value) in qualified business activities to receive the Section 1202 exclusion.
How the Section 1202 Exclusion Became So Lucrative
The federal government sweetened the deal for investors following the Great Recession. Before 2009, Section 1202 allowed certain small businesses and start-ups to exclude 50% of capital gain in their gross income. The 2009 Recovery Act increased the exclusion to 75% of the capital gain of the sale of qualified small business stock (Q.S.B.S.) purchased between February 18, 2009, and September 27, 2010. The exclusion expanded to 100% of capital gain after September 27, 2010. Today, those selling a qualifying business receive:
- 100% exclusion from U.S. federal capital gain tax. (Sometimes the exclusion is a lower percentage. See below.)
- 100% exclusion from the alternative minimum tax
- Exclusion from the 3.8% net investment income tax
When you sell a business that does not qualify for Section 1202 exclusions, you probably will be responsible for paying the taxes on gains related to selling small business stock at the maximum rate of 28.7%.
Section 1202 Considerations for the Easy Sale of a Business
When you are ready to cash out on the successful launch of your business, pay close attention to whether your business is structured for easy sale AND for keeping you eligible for Section 1202 gain exclusions. To qualify for the exclusions, you must sell stock, not assets (deemed or actual). However, most buyers want to buy your company’s assets, not your stock. When you offer stock, and the other party is buying most of the shares, they will likely demand a discount. In this scenario, you may benefit from rolling over 20% to 30% of your equity as part of a structured deal. You will be allowed to defer gain, and be positioned to claim a Section 1202 gain exclusion, when the buyer eventually sells the rollover equity.
Many other ways to structure a business for easy sale are buried in the tax code. Here at Swiecicki & Muskett, we are experts at uncovering the opportunities lying just under the surface of the mountains of rules enforced by the I.R.S. and the court system.
Moves for When You Don’t Qualify for Section 1202 (Yet)
Suppose you want to take advantage of the Section 1202 exclusions but can’t because you have the wrong business structure. If you expect significant appreciation of your company’s stock and plan to sell your business or stock, changing your structure from an S corporation to a C corporation is a wise move. Capital gain after the conversion will qualify for exclusion on Section 1202.
The corporate tax team at Swiecicki & Muskett has many other solutions for structuring your business for an easy and lucrative sale. Based in St. Louis County, Christopher Swiecicki and his team serve growing businesses of all structures and sizes. Contact him at 636-778-0209 or email Chris@SwiecickiLaw.com.
As a small business owner, you know how important it is to seek legal advice and services when needed. From drafting contracts to resolving disputes, legal fees can quickly add up. However, many types of legal fees are tax-deductible, potentially saving you money come tax season. Just which legal fees are eligible for tax deductions? And are there any tax advantages of legal services worth exploring?
What Types Of Legal Fees Are Tax-Deductible?
Certain legal fees incurred by you in the operation of your business are tax deductible, such as:
Legal fees incurred during this process can be deducted up to $5,000 in the business’s first year if you’re creating or buying a business. This includes fees associated with creating legal documents or paying state incorporation fees. Any remaining startup costs must be amortized over time. This is important to remember when starting a new business, as the costs of creating or buying a business can quickly increase.
Legal fees for defending or protecting your business from lawsuits can be deductible. This includes fees for attorneys, court costs, and other related expenses.
For instance, if a customer sues your company for a defective product or a supplier sues you for breach of contract, the legal fees for defending yourself in court can be deducted. (That said, this significant expense can often be avoided by having proper legal documentation in place—specifically, contracts and agreements.)
Tax Advice or Preparation
Legal fees related to tax advice or tax preparation are also deductible. This includes fees for tax attorneys, accountants, and other professionals who provide tax advice or prepare tax returns. This is a critical deduction to remember, as tax preparation and advice can be essential in ensuring your business complies with tax laws and regulations.
How Much Can You Deduct?
The amount a business owner can deduct in legal fees in a year depends on the type of legal expenses incurred.
Business expenses are defined as costs incurred “while operating a necessary and ordinary business.” These expenses are typically fully deductible on a business’s tax return. Examples of business expenses include rent, salaries, supplies, and utilities. The IRS allows businesses to deduct the total cost of these expenses from their taxable income, reducing the amount of tax owed.
The 2% rule applies to miscellaneous itemized deductions, meaning you can only deduct a portion of an expense if it exceeds 2% of your adjusted gross income (AGI). However, recent changes to tax rules have impacted which expenses qualify as miscellaneous deductions.
While some fees are fully deductible, such as startup costs, others may limit the amount you can deduct. This can make navigating the deduction process complex and time-consuming, which is why many businesses turn to professionals to ensure they maximize their deductions.
For startup costs, the IRS allows a deduction of up to $5,000 in the business’s first year. Any remaining startup costs must be amortized over time. You can deduct a portion of the startup costs each year until you’ve deducted the full amount. The amortization period typically lasts for 15 years, but there are exceptions for certain types of businesses.
There’s no limit to the legal fees you can deduct for defense costs. However, it’s important to remember these fees must be directly related to defending or protecting your business from lawsuits. Legal fees related to personal matters aren’t deductible.
For tax advice or preparation, the amount of deductible legal fees vary depending on the type of service provided. For instance, legal fees for tax preparation and advice are deductible in full. However, legal fees for tax planning, such as setting up a tax shelter or tax avoidance scheme, may be subject to limitations.
It’s important to note the IRS has strict rules about what legal fees are tax deductible. So, working with a tax professional or accountant is always a good idea to ensure you’re deducting the correct amount.
Additionally, documentation of legal fees is essential for tax purposes, so keep accurate records of all legal expenses incurred throughout the year.
Which Legal Fees Are Not Tax Deductible?
It’s important to note legal fees related to personal matters, such as divorce or estate planning, can’t be deducted. Additionally, legal fees that aren’t directly related to your business aren’t deductible. This includes legal fees for personal lawsuits or disputes unrelated to your business.
For example, if a former employee is suing you, but the lawsuit has nothing to do with your business, you can’t deduct the legal fees for defending yourself against this suit.
However, these fees are deductible if the suit relates to a business dispute (such as an employee suing for unpaid wages).
The IRS also does not allow you to deduct legal fees for the following:
- Personal lawsuits or other legal disputes unrelated to your business.
- Legal fees for divorces, child custody issues, and similar matters.
- Legal expenses related to criminal activities.
Keeping track of your legal fees throughout the year is essential, as working with a tax professional or accountant to determine the tax advantage of legal services for your business. Deducting legal fees is a small but important way to keep your business financially healthy. For more on the intersection of legal help and tax law, contact us.
A day barely goes by without a news report about some corporate entity making a serious misstep that has them facing fines and penalties. Several cases of corporate litigation come to mind: Lawsuits against the tobacco industry and big pharma are probably the most publicized. And there are cases of environmental harm by manufacturers, public utilities, or most recently, railroad accidents impacting both the land and the communities that live there.
While most of these companies do not mean to cause harm, there is little argument that they do bear some responsibility for their part in certain outcomes. It is no surprise when a government entity like the EPA imposes fines, or when a trial results in a court-ordered settlement for compensatory or punitive damages.
When a company makes a mistake (or breaks the law,) the CFO and the rest of the C-Suite understand that they must pay the penalty imposed. There can be a silver lining though: Some portions of the payment may be tax deductible. But the ability to take advantage of the deduction depends on the structure and wording of the settlement agreement. This is why it is essential to bring in skilled counsel like Swiecicki & Muskett Attorneys at Law early in the process. A combination of expertise in both taxation law and corporate litigation is necessary to make the best of a bad situation.
Paying a Corporate Settlement for a Mishap
Disasters like the collapse of the Taum Sauk Reservoir in Missouri in 2005 or the Norfolk Southern derailment in Ohio in 2023 result in environmental issues and incur large settlements paid to government entities. While a corporation will negotiate to reduce the amount of their fines and penalties, if possible, they have no choice but to pay up once everything is settled.
But consider this: Say a settlement calls for payment due to the government of $10,000,000. But what if that amount is tax deductible at a 35% tax rate? This means a tax deduction of $3,500,000, or in other words, a net cash outflow of $6,500,000 instead of the full $10,000,000.
This is still a very large number, of course, but the reduction is significant. And for a smaller company, the difference between paying the full amount of a settlement with or without a tax deduction can mean the ability to make payroll, or even keep the doors open.
It is extremely unlikely, if not impossible, that an entire settlement would be tax deductible as in the example above. There are strict requirements for which portions are, and which are not, deductible. Furthermore, the settlement must be structured properly from the start; there is no going back to claim a deduction after the fines are paid.
Any company finding itself subject to fines and penalties can improve its outcome with a corporate tax attorney who understands the IRS rules and can structure the settlement appropriately.
What is Deductible After a Catastrophe?
Understanding the tax treatment of fines and penalties paid by corporations requires in-depth knowledge of Internal Revenue Code Section 162(f). A typical accounting department or even corporate counsel might not have the experience in both tax and litigation to unravel the complex rules surrounding the topic.
IRC Section 162(f) dictates that in general, a tax deduction is not allowed if the company violated any law. The exceptions to this are compensatory amounts paid for “restitution, remediation, or to come into compliance” with a law.
This means that if the taxpayer (the corporation that paid the fine or penalty) can establish that the money paid went toward correcting or remedying the situation, it might be able to be claimed as a deduction. So, if the money is restitution to those who were harmed, remediation of damaged property, or helps the company come into compliance with the law, it could be eligible.
- Repayment of embezzled funds, for example, falls under the category of restitution, so could be claimed as a tax deduction.
- If the corporation must reimburse the government for the costs to investigate or litigate, those amounts are not restitution, remediation, or to come into compliance, and are therefore not allowable as a deduction.
There are many other compensatory amounts involved in a corporate settlement that a corporate litigation attorney may or may not be able to make an argument for as deductible. This is why finding someone who specializes in these cases is so important.
Structuring the Settlement for the Best Outcome
A tax deduction is not just an accounting trick; it is cash back in the pockets of a corporation after paying a large sum. That cash can help lessen the blow to a company and its shareholders after a disastrous and expensive event.
In order to maximize the tax benefits of a settlement with a government entity, corporations must act fast to bring in legal counsel to help draft the agreement. The calculations and verbiage built into the document will determine the end result.
An experienced tax attorney will be able to differentiate the funds paid into different “buckets.” There are amounts that will be clearly either compensatory or non-compensatory. Then there are dollars that are subject to interpretation. It is here where a firm like Swiecicki & Muskett excels, finding ways to categorize expenses that will present a viable argument for the IRS.
The IRS can and typically will dispute claims that are not clear-cut. Settlement agreements that are drafted properly with the correct legal language and phrasing can stand up to the challenge.
No corporation is happy about making a mistake that causes damage or hurts people or the environment. And when accidents happen, they understand that there will be a price to pay. But understanding the tax implications of a corporate lawsuit can lessen the blow.
Creating a tax strategy takes teamwork among legal, finance, and accounting professionals. Many companies trust an independent corporate tax lawyer as an advisor to the tax strategy team. When you are ready to add a corporate tax lawyer to your team, how do you find one? The search starts the old-fashioned way and ends with a list of interview questions.
Ask for a Referral to a Corporate Tax Lawyer
This is a case when “Googling it” is not a good first step. You will not see many listings for “corporate tax lawyer.” You probably will have better success by asking your professional network if they will refer you to a corporate tax lawyer. Inquire with your banker and accountant, and the lawyers you work with on other matters. Most of us trust recommendations from respected colleagues, which is why this is the best way to find a lawyer you will trust from day one.
If you do not get a referral from someone you know, check with the bar associations in your area; for Missouri, those include the Federal Bar Association and the Eighth Circuit Bar Association, the bar for the St. Louis area. (You can also learn about our own Taxation Law capabilities here at Swiecicki & Muskett.)
Check Their Credentials for Practicing Taxation Law
The practice of taxation law requires a minimum of a Juris Doctor degree, known as a J.D. The attorney also must be licensed by the state bar. Many corporate tax lawyers expand their expertise and earn a Master of Laws in Taxation degree, known as an L.L.M.. Some are certified public accountants and others have served in corporate finance positions.
Christopher Swiecicki, founder and managing attorney at Swiecicki & Muskett, L.L.C., practices taxation law with the insight of decades of experience in law, finance, and accounting. During his career he has:
- Earned a J.D. in 1990 and an L.L.M. in 2005, both from the Washington University School of Law, one of the top law schools in the nation.
- Taught a course in Business Acquisitions as an adjunct professor at the Washington University School of Law since 2011.
- Worked as a tax accountant at one of the Big Four accounting firms.
- Served as inside tax counsel to a Fortune 500 Company.
- Worked as inside tax counsel to a regional financial institution.
- Served as a chief financial officer and general counsel for a $40 million private company.
- Been recognized as an expert in the field by the Association of Corporate Counsel and the American Bar Association.
Today, Christopher Swiecicki provides personalized service to business owners and executives at major corporations. He keeps his client roster small enough to respond quickly to every client. When he meets with clients, he has in-depth knowledge of their needs. (To begin a conversation, you can find his contact information here.)
Ask If the Corporate Tax Lawyer Has Applicable Experience
A corporate tax lawyer might have impressive credentials but lack experience related to your situation. Ask them about it before signing a contract with them. In some cases, you may need to meet with them to explain your situation. If you learn they are not experienced in the area you need help with, ask them for a referral to another corporate tax lawyer.
Learn What the Corporate Tax Attorney Will Do for You
When hiring a corporate tax attorney, find out what they will do for you. Christopher Swiecicki has decades of experience advising companies on the federal tax-related aspects of acquisitions and dispositions, mergers and financial structures and products, and corporate governance. If you are seeking counsel in one of these areas, contact Swiecicki to discuss your situation and see if there is a good fit.
In other situations, consider asking the following questions, or variations of them, depending upon your business:
- What is your experience with a business like ours?
- How do you see our business interests intersecting with tax law?
- How will you apply your knowledge of taxation law to help us manage our business functions more effectively?
- Will you help us decide whether to set up a C-Corp or an LLC?
- What skills and resources do you have to help our company manage tax exposure and risk?
- How does your team stay current on IRS rulings and government programs affecting business taxes?
- Will you advise us on the tax ramifications of current operational and business decisions?
- Do you provide counsel related to e-commerce and cloud-based services?
- Do you have experience litigating cases before the IRS?
At Swiecicki & Muskett, we serve businesses in many industries with varied structures and sizes. We are constantly gaining new insights, thanks to the diversity of our clientele.
When you are ready to increase profits with a sophisticated tax strategy, contact us. We will serve you with the strength of our experience combined with constant attention to changes in taxation law. Contact Christopher Swiecicki at 636-778-0209 or email Chris@SwiecickiLaw.com.