HOW THE FRANCHISE PURCHASE PLAN WORKS
Downsizing, out-sourcing and big corporation burnout, have led many people to look for new business opportunities.
High among their considerations is the acquisition of a franchise or other business. Most people will need to finance a major portion of the purchase. This is normally done with an SBA or conventional loan. These lenders will generally require up to a 30% equity infusion by the purchaser.
Source of Equity
Where does the purchaser get this equity? The answer is the Franchise Purchase Plan. It allows you to use the money you have in a rollover IRA or in an old qualified retirement plan account to purchase a franchise without causing that money to be taxed or subject to penalty.
The Three Criteria
The first step is to complete the Franchise Purchase Plan Entity Information Sheet. With this information, we will file documents to organize your corporation in your home state. Your corporation will be a C-corporation for federal income tax purposes. The corporation will adopt a qualified retirement plan. Both the client and the qualified retirement plan will purchase stock from the corporation. The corporation will use the proceeds from the sale of its stock to purchase the franchise.
The Franchise Purchase Plan addresses our three criteria for selecting the proper business structure, that is, current tax advantage, tax advantaged exit strategy upon sale of the business and liability protection.
Current Tax Advantage
The C-corporation structure will allow you to take advantage of several tax deductible expenditures that are not available to any other type of entity. For example, health and life insurance premium are fully deductible by the corporation. In addition, child care expenses, doctor co-pays and insurance deductible payments to name a few, can all be excluded from your taxable income.
New businesses are likely to generate tax losses. These tax losses can be carried forward for 20 years to offset your future taxable income.
Tax Advantaged Exit Strategy
If you sell your business you need to know how to sell it without paying the dreaded “double tax”. Double taxation occurs when a C-corporation sells its assets. Since the C-corporation is a taxable entity it will pay tax on the difference between the sale price and the corporation’s basis in the assets sold. This is the first tax. When the corporation distributes the balance of the sales proceeds to its shareholders the shareholders will pay tax. This is the second tax. Of course, this is only an issue if you sell your business at a profit. Not all businesses can be sold at a profit either because they are not profitable or they are profitable but have not created goodwill which can be sold.
The Staples Law Firm has well developed exit strategies for our clients to eliminate, greatly reduce or defer the second tax well into the future. We discuss those strategies privately with our clients and tailor these strategies on an individual basis for each client.
Every business owner needs to be aware of two types of liability, “inside liability” and “outside liability”.
If you have a slip-and-fall on your business premises you and your business entity will be sued. This is inside liability, the liability the operation of the business brings to you individually. Because the Franchise Purchase Plan structure uses a corporation to conduct business, you will be not be held liable for liabilities of the business operation. The one caveat is that you must have properly created the corporation, followed all legal formalities and have properly documented the meetings of the shareholders and board of directors on an annual basis. The Staples Law Firm will ensure that these legal requirements are met.
If you are sued individually and a judgment is entered against you, the creditor will levy execution against your property that is not protected by state law. This is outside liability, the ability of a non-business creditor to seize your business assets. (Check AssetProtectionBook.Com to see what property your state protects from creditors.)
The Staples law Firm will show you how to use these principles and the Franchise Purchase Plan to keep a judgment creditor from taking your business away from you.
A creditor’s victory becomes very hollow. But for you it is business as usual.
It is also possible to protect many of your non-business assets by using a series of limited liability companies and limited partnerships. We will discuss how these can be used to protect your assets.