1. Legal liability.
How can I get the best protection from general business liabilities that can threaten not only my business assets but my family’s assets as well?

2. Tax considerations.
How can I get the best tax breaks out of the business entity that I select?

Liability is an argument best left to yourself, your business partners, and your business attorney. It is the second question involving the search for shelter from high taxes that sets the overall theme for Top Tax Savings Ideas.

If you are an unmarried dependent, you must file a tax return if your earned and/or unearned income exceeds certain limits.

• Even if you do not have to file, you should file a federal income tax return to get money back if any of the following apply:
1. You had income tax withheld from your pay.
2. You qualify for the earned income credit.
3. You qualify for the additional child tax credit.

The sole proprietorship is thought of as the quickest and easiest way to set up a business operation. There are no blanket prerequisites, nor are there any specific costs in starting a sole proprietorship. There may be some minor formalities, however, that will need attention depending on your state or your jurisdiction. These formalities, which of course apply to all business entities, mean that you will probably have to:

• Obtain an occupancy permit for your place of business,
• Secure a business license, and
• Apply for a franchise or registration number for your operation. This registration number will be used by the state agency to monitor the collection of sales tax and other regulatory matters.

All of these procedures are simple and can be done without the assistance of an attorney or accountant regardless of the state in which you are doing business. Once you start a sole proprietorship, you are the sole owner. Unless you are in a community property state in which your spouse is vested with a one-half interest, you alone have full control and responsibility for the operation.

Like the sole proprietorship, starting up the general partnership could be a relatively easy process. No costs or formalities are required. Wise counsel, however, will give you about a dozen reasons why you should have a detailed partnership agreement drafted whenever you put yourself on the line with any other individual. A few items that you would be best advised to spell out in writing are:

• The amount of capital each partner is expected to contribute up front;
• The rights and duties of the partners;
• The method for sharing profits and losses;
• The authorization for cash withdrawals and salaries,
• The methods for resolving disputes or taking in new partners; and
• The method for dissolving the partnership should dissolution become necessary. Remember, this is often the case

A limited partnership is much like a general partnership except for one important fundamental difference. The limited partner is protected by law because the limited partner’s legal liability in the business is generally limited to the amount of his or her investment. It enables this special type of investor to share in the partnership profits without being exposed to its debts in the event the company goes out of business. This protection exists as long as the limited partner does not play an active role in the partnership operation.

Unlike the partnerships described above, the corporation is considered an artificially created legal entity that exists separate and apart from those individuals who created it and carry on its operations. With as little as one incorporator, a corporation can be formed by simply filing an application for a charter with the respective state. By filing this application, the incorporator will put on record facts, such as:

• The purpose of the intended corporation,
• The names and addresses of the incorporators,
• The amount and types of capital stock the corporation will be authorized to issue, and
• The rights and privileges of the holders of each class of stock.

It is true that operating as a corporation has its share of drawbacks in certain situations. For example, as a business owner, you would be responsible for additional record keeping requirements and administrative details. More important, in some cases, operating as a corporation can create an additional tax burden. This is the last thing a business owner needs, especially in the early stages of operation. Remember, aside from tax reasons, the most common motivation for incurring the cost of setting up a corporation is the recognition that the shareholder is not legally liable for the actions of the corporation. This is because the corporation has its own separate existence wholly apart from those who run it.

There are pros and cons to operating your business as a corporation. One of the biggest tax disadvantages for the ordinary C corporation is the dreaded double taxation. Many business owners opt for electing to operate their corporations under subchapter S of the Internal Code. Also known as an S corporation, this entity allows income to pass through to the individual shareholders.

• Unlimited life.
Unlike proprietorships and partnerships, the life of the corporation is not dependent on the life of a particular individual or individuals. It can continue indefinitely until it accomplishes its objective, merges with another business, or goes bankrupt. Unless stated otherwise, it could go on indefinitely.

• Transferability of shares.
It is always nice to know that the ownership interest you have in a business can be readily sold, transferred, or given away to another family member. The process of divesting yourself of ownership in proprietorships and partnerships can be cumbersome and costly. Property has to be retitled, new deeds drawn, and other administrative steps taken any time the slightest change of ownership occurs. With corporations, all of the individual owners’ rights and privileges are represented by the shares of stock they hold. The key to a quick and efficient transfer of ownership of the business is found on the back of each stock certificate, where there is usually a place indicated for the shareholder to endorse and sign over any shares that are to be sold or otherwise disposed of.

• Ability to raise investment capital.
It is usually much easier to attract new investors into a corporate entity because of limited liability and the easy transferability of shares. Shares of stock can be transferred directly to new investors, or when larger offerings to the public are involved, the services of brokerage firms and stock exchanges are called upon.

The S corporation had been referred to as the logical choice for those small businesses that need to steer away from the regular corporation and its potential tax pitfalls. Increasingly, however, the LLC has been coming to the forefront as another viable alternative. This is especially the case now that much of the air is clearing within the various state laws and professional organizations that deal with LLCs. In fact, many practitioners argue that the LLC is now the preferred choice in the following situations where:

• Legal liability protection is a primary concern
• A simplified “one time” tax on the owners is preferred to dealing with cumbersome corporate tax liability
• The entity cannot qualify for subchapter S status.

An LLC is a hybrid entity that has the legal protections of a corporation and the ability to be taxed (one time) as a partnership. In many regards, LLCs are treated much like S corporations for tax purposes. However, there are some additional advantages over S corporations, including the following examples:

• The LLC usually offers better leeway for owners who wish to write off business losses in a business that relies on entity-related debt that is incurred
• The LLC allows greater flexibility for the owner to take assets out of the company without incurring unplanned tax liability

Remember to check with your lawyer or accountant about the advantages of the LLC in your particular state. Ask up front what it would cost to form a corporation versus the cost of forming an LLC. You may be surprised to learn that in some states an LLC could be established by filing a simple, one-page document, which lays out the Articles of Organization of your LLC, with the secretary of state.

You can form an LLC for any lawful business as long as the nature of the business is not banking, insurance, and certain professional service operations. By simply filing articles of organization with the respective state agency, an LLC takes on a separate identity. Similar to a corporation, but without the tax problems of the corporation, it will be taxed like a partnership.

You may choose any recordkeeping system suited to your business that clearly shows your income and expenses. Except in a few cases, the law does not require any special kind of records. However, the business you are in affects the type of records you need to keep for federal tax purposes. Your recordkeeping system should also include a summary of your business transactions. This summary is ordinarily made in your business books (for example, accounting journals and ledgers). Your books must show your gross income, as well as your deductions and credits. For most small businesses, the business checkbook is the main source for entries in the business books.

Purchases, sales, payroll, and other transactions you have in your business will generate supporting documents such as invoices and receipts. Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. These documents contain the information you need to record in your books. It is important to keep these documents because they support the entries in your books and on your tax return. You should keep them in an orderly fashion and in a safe place. For instance, organize them by year and type of income or expense.

• Gross receipts are the income you receive from your business. You should keep supporting documents that show the amounts and sources of your gross receipts. Documents for gross receipts include the following:

o Cash register tapes
o Bank deposit slips
o Receipt books
o Invoices
o Credit card charge slips
o Forms 1099-MISC

• Purchases are the items you buy and resell to customers. If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products. Your supporting documents should show the amount paid and that the amount was for purchases. Documents for purchases include the following:

o Canceled checks
o Cash register tape receipts
o Credit card sales slips
o Invoices

• Expenses are the costs you incur (other than purchases) to carry on your business. Your supporting documents should show the amount paid and that the amount was for a business expense. Documents for expenses include the following:

o Canceled checks
o Cash register tapes
o Account statements
o Credit card sales slips
o Invoices
o Petty cash slips for small cash payments

• Travel, Transportation, Entertainment, and Gift Expenses
If you deduct travel, entertainment, gift or transportation expenses, you must be able to prove (substantiate) certain elements of expenses.
• Assets are the property, such as machinery and furniture, that you own and use in your business. You must keep records to verify certain information about your business assets. You need records to compute the annual depreciation and the gain or loss when you sell the assets. Documents for assets include the following:

When and how you acquired the assets.

o Purchase price
o Cost of any improvements.
o Section 179 deduction taken.
o Deductions taken for depreciation.
o Deductions taken for casualty losses, such as losses resulting from fires or storms.
o How you used the asset.

When and how you disposed of the asset.

o Selling price.
o Expenses of sale.
The following documents may show this information.
o Purchase and sales invoices.
o Real estate closing statements.
o Canceled checks.

Estate planning is a process. It involves people – your family, other individuals and, in many cases, charitable organizations of your choice. It also involves your assets (your property) and the various forms of ownership and title that those assets may take. And it addresses your future needs in case you ever become unable to care for yourself.

Through estate planning, you can determine:

• How and by whom your assets will be managed for your benefit during your lifetime if you ever become unable to manage them yourself.
• When and under what circumstances it makes sense to distribute your assets during your lifetime.
• How and to whom your assets will be distributed after your death.
• How and by whom your personal care will be managed and how health care decisions will be made during your lifetime if you become unable to care for yourself.

Many people mistakenly think that estate planning only involves the writing of a will. Estate planning, however, can also involve financial, tax, medical and business planning. A will is part of the planning process, but you will need other documents as well to fully address your estate planning needs.

The purpose of this pamphlet is to summarize the estate planning process, and illustrate how it can help you meet your goals and objectives. You will discover that estate planning is a dynamic process. Just as people and assets and laws change, it may well be necessary to adjust your estate plan every so often to reflect those changes.

There are many issues to consider in creating an estate plan. First of all, ask yourself the following questions:

• What are my assets and what is their approximate value?
• Whom do I want to receive those assets – and when?
• Who should manage those assets if I cannot – either during my lifetime or after my death?
• Who should be responsible for taking care of my minor children if I become unable to care for them myself?
• Who should make decisions on my behalf concerning my care and welfare if I become unable to care for myself?
• What do I want done with my remains after I die and where would I want them buried, scattered or otherwise laid to rest?

Once you have some answers to these questions, you are ready to seek the advice and services of a qualified lawyer (see #18). Such a lawyer can help you create an estate plan, and advise you on such issues as taxes, title to assets and the management of your estate.

You do – whether your estate is large or small. Either way, you should designate someone to manage your assets and make health care and personal care decisions for you if you ever become unable to do so for yourself. If your estate is small, you may simply focus on who will receive your assets after your death, and who should manage your estate, pay your last debts and handle the distribution of your assets. If your estate is large, your lawyer will also discuss various ways of preserving your assets for your beneficiaries and of reducing or postponing the amount of estate tax which otherwise might be payable after your death. If you fail to plan ahead, a judge will simply appoint someone to handle your assets and personal care. And your assets will be distributed to your heirs according to a set of rules known as intestate succession. Contrary to popular myth, everything does not automatically go to the state if you die without a will. Your relatives, no matter how remote, and, in some cases, the relatives of your spouse will have priority in inheritance ahead of the state. Still, they may not be your choice of heirs; an estate plan gives you much greater control over who will inherit your assets after your death.

All of your assets. This could include assets held in your name alone or jointly with others, assets such as bank accounts, real estate, stocks and bonds, and furniture, cars and jewelry.

Your assets may also include life insurance proceeds, retirement accounts and payments that are due to you (such as a tax refund, outstanding loan or inheritance).

The value of your estate is equal to the “fair market value” of all of your various types of property – after you have deducted your debts (your car loan, for example, and any mortgage on your home.)

The value of your estate is important in determining whether your estate will be subject to estate taxes after your death (see #11) and whether your beneficiaries could later be subject to capital gains taxes. Ensuring that there will be sufficient resources to pay such taxes is another important part of the estate planning process.

A will is a traditional legal document which:

• Names individuals (or charitable organizations) who will receive your assets after your death, either by outright gift or in a trust.
• Nominates an executor who will be appointed and supervised by the probate court to manage your estate; pay your debts, expenses and taxes; and distribute your estate according to the instructions in your will. • Nominates guardians for your minor children.

Most assets in your name alone at your death will be subject to your will. Some exceptions include securities accounts and bank accounts that have designated beneficiaries, life insurance policies, IRAs and other tax-deferred retirement plans, and some annuities.

Such assets would pass directly to the beneficiaries and would not be included in your will.

In addition, certain co-owned assets would pass directly to the surviving co-owner regardless of any instructions in your will. And assets that have been transferred to a revocable living trust would be distributed through the trust-not your will.

For some, a California Statutory Will (a fill-in-the-blanks form) may be sufficient. This form can be printed out from the State Bar Web site at www.calbar.ca.gov (go to Public Services and Making a Simple Will). Keep in mind, however, that you must execute your will in the manner required by California law. Failure to do so could invalidate the entire will. You should discuss such requirements with a qualified lawyer.

It is a legal document that can, in some cases, partially substitute for a will. With a revocable living trust (also known as a revocable inter vivos trust or grantor trust), your assets are put into the trust, administered for your benefit during your lifetime and transferred to your beneficiaries when you die – all without the need for court involvement.

Most people name themselves as the trustee in charge of managing their living trust’s assets. By naming yourself as trustee, you can remain in control of the assets during your lifetime. In addition, you can revoke or change any terms of the trust at any time as long as you are still competent. (The terms of the trust become irrevocable when you die.)

In your trust agreement, you will also name a successor trustee (a person or institution) who will take over as the trustee and manage the trust’s assets if you should ever become unable to do so. Your successor trustee would also take over the management and distribution of your assets when you die.

A living trust does not, however, remove all need for a will. Generally, you would still need a will – known as a pour over will – to cover any assets that have not been transferred to the trust.

You should consult with a qualified estate planning lawyer to assist you in the preparation of a living trust, your will and other estate planning documents. Also, keep in mind that your choice of trustees is extremely important. That trustees management of your living trust assets will not be automatically subject to direct court supervision.

Probate is a court-supervised process for transferring a deceased person’s assets to the beneficiaries listed in his or her will.

Typically, the executor named in your will would start the process after your death by filing a petition in court and seeking appointment. Your executor would then take charge of your assets, pay your debts and, after receiving court approval, distribute the rest of your estate to your beneficiaries. If you were to die intestate (that is, without a will), a relative or other interested person could start the process.

In such an instance, the court would appoint an administrator to handle your estate. Personal representative is another term used to describe the administrator or executor appointed to handle an estate.

Simpler procedures are available for transferring property to a spouse or for handling estates in which the total assets amount to less than $100,000. The probate process has advantages and disadvantages.

The probate court is accustomed to resolving disputes about the distribution of assets fairly quickly through a process with defined rules. In addition, the probate court reviews the personal representative’s handling of each estate, which can help protect the beneficiaries’ interests.

One disadvantage, however, is that probates are public. Your estate plan and the value of your assets will become a public record. Also, because lawyer’s fees and executors commissions are based on a statutory fee schedule, a probate may cost more than the management and distribution of a comparable estate under a living trust.

Time can be a factor as well. A probate proceeding generally takes longer than the administration of a living trust. Discuss such advantages and disadvantages with an estate planning lawyer before making any decisions.

Yes. You should consider alternative beneficiaries in the event that your primary beneficiary does not survive you.

And if a beneficiary is too young or too disabled to handle an inheritance, you might consider setting up a trust for his or her benefit under your will or living trust.

Once you have decided who should receive your assets, it is very important that you correctly identify those chosen individuals and charitable organizations in your will or trust.

Many organizations have similar names and, in some families, individuals have similar or even identical names. An estate planning lawyer can help you clarify and appropriately identify your beneficiaries.

That is your decision. You could name your spouse or domestic partner as your executor or trustee. Or you might choose an adult child, another relative, a family friend, a business associate or a professional fiduciary such as a bank. Your executor or trustee does not need any special training. What is most important is that your chosen executor or trustee is organized, prudent, responsible and honest.

While the executor of a will is subject to direct court supervision and the trustee of a living trust is not, they serve almost identical functions. Both are responsible for ensuring that your written instructions are followed.

One difference is that the trustee of your living trust may assume responsibilities under the trust agreement while you are still living (if you ever become unable or unwilling to continue serving as trustee yourself).

Discuss your choice of an executor or trustee with your estate planning lawyer. There are many issues to consider. For example, will the appointment of one of your adult children hurt his or her relationship with any other siblings? What conflicts of interest would be created if you name a business associate or partner as your executor or trustee? And will the person named as executor or successor trustee have the time, organizational ability and experience to do the job effectively?

First of all, in your will, you should nominate a guardian to supervise and care for your child (and to manage the childs assets) until he or she is 18 years old.

Under California law, a minor child (a child under age 18) would not be legally qualified to care for himself or herself if both parents were to die. Nor is a minor legally qualified to manage his or her own property.

Your nomination of a guardian could avoid a “tug of war” between well-meaning family members and others.

You also might consider transferring assets to a custodian account under the California Uniform Transfers to Minors Act to be held for the child until he or she reaches age 18, 21 or 25.

Or you might consider setting up a trust to be held, administered and distributed for the child’s benefit until the child is even older.

Estate taxes are imposed upon estates that have a net value of $2 million or more. That amount will increase to $3.5 million in 2009. In 2010, the estate tax will disappear completely.

Then, unless Congress passes an extension, the exemption will revert back to $1 million in 2011. For estates that approach or exceed these amounts, significant estate taxes can be saved by proper estate planning, usually before your death or, for couples, before one of you dies.

Keep in mind that tax laws often change. And estate planning for tax purposes must take into account not only estate taxes, but also income, capital gains, gift, property and generation-skipping taxes as well. Qualified legal advice about taxes and current tax law should be obtained from a competent lawyer during the estate planning process.

Yes. The nature of your assets and how you hold title to those assets is a critical factor in the estate planning process. Before you take title (or change title) to an asset, you should understand the tax and other consequences of any proposed change. Your estate planning lawyer will be able to advise you.

• Community property and separate property. If you are married or a registered domestic partner, assets earned by either you or your spouse or domestic partner while married or in the partnership and while a resident of California are community property. (Note: Earned income in domestic partnerships, however, may not be treated as community property for federal income tax purposes.)

As a married individual or registered domestic partner, you may continue to own certain separate property as well-property which you owned prior to the marriage or domestic partnership. A gift or inheritance received during the marriage or partnership would be considered separate property as well.
Separate property can be converted to community property (and vice versa) by a written agreement (it must conform with California law) signed by both spouses.

However, taking such a step can have significant tax and other consequences. Make sure that you understand such consequences before making any such change.

• Tenants-in-common. If you own property as tenants in common and one co-tenant (co-owner) dies, that co-tenant’s interest in the property would pass to the beneficiary named in his or her will. This would apply to co-tenants who are married or in a domestic partnership as well as to those who are single.

• Joint tenancy with right of survivorship. Co-owners (married or not) of a property can also hold title as joint tenants with right of survivorship. If one tenant were to die in such a situation, the property would simply pass to the surviving joint tenant without being affected by the deceased person’s will.

• Community property with right of survivorship. If you are married or in a registered domestic partnership, you and your spouse or partner could also hold title to property as community property with right of survivorship.

Then, if your spouse or domestic partner were to die, the property would pass to you without being affected by the deceased person’s will.

Married couples and registered domestic partners also have the option of jointly holding title to property as community property. In such a situation, if one spouse or partner were to die, his or her interest would be distributed according to the instructions in his or her will.

Yes. Certain kinds of assets are transferred directly to the named beneficiaries. Such assets include:

• Life insurance proceeds.
• Qualified or non-qualified retirement plans, including 401(k) plans and IRAs.
• Certain “trustee” bank accounts.
• Transfer on death (or TOD) securities accounts.
• Pay on death (or POD) assets, a common title on U.S. savings bonds.
Keep in mind that these beneficiary designations can have significant tax benefits and consequences for your beneficiaries-and must be carefully coordinated with your overall estate plan.

You can help determine what will happen by making your own arrangements in advance. Through estate planning, you can choose those who will care for you and your estate if you ever become unable to do so for yourself. Just make sure that your choices are documented in writing.

If you set up a living trust, for example, the trustee will provide the necessary management of those assets held in trust. You should also consider setting up a durable power of attorney for property management to handle limited financial transactions and to deal with assets that may not have been transferred to your living trust. By doing this, you designate an agent or attorney-in-fact to make financial decisions and manage your assets on your behalf if you become unable to do so.

And by setting up an advance health care directive/durable power of attorney for health care, you can also designate an attorney-in-fact to make health care decisions for you if you ever become unable to make such decisions.

In addition, this legal document can contain your wishes concerning such matters as life-sustaining treatment and other health care issues and instructions concerning organ donation, disposition of remains and your funeral.

Both of these attorneys-in-fact lose the authority to make decisions on your behalf when you die.

If you have not made any such arrangements in advance and you become unable to make sound decisions or care for yourself, a court could appoint a court-supervised conservator to manage your affairs and be responsible for your care.

The court’s supervision of the conservator may provide you with some added safeguards. However, conservatorships can also be more cumbersome, expensive and time-consuming than the appointment of attorneys-in-fact under powers of attorney.

In any event, even if you appoint attorneys-in-fact who could manage your assets and make future health care decisions for you, you should still document your choice of conservators in case a conservatorship is ever necessary.

• Can I do it myself? Yes. It is possible for a person to do his or her own estate planning with forms or books obtained at a stationery store or bookstore or from the State Bar. At the very least, a review of such forms can be helpful in preparing you for estate planning. If you review such materials and have any unanswered questions, however, you should seek professional help.
• Do I need a professional’s help? It depends. If you do seek advice, keep in mind that wills and trusts are legal documents that should only be prepared by a qualified lawyer. Many other professionals and business representatives, however, may become involved in the estate planning process. For example, certified public accountants, life insurance salespersons, bank trust officers, financial planners, personnel managers and pension consultants often participate in the estate planning process. Within their areas of expertise, these professionals can assist you in planning your estate.

The State Bar urges you, however, to seek advice only from professionals who are qualified to give estate planning advice. Many professionals must be licensed by the state.

Ask the professional about his or her qualifications. And ask yourself whether the advisor might have an underlying financial incentive to sell you a particular investment, such as an annuity or life insurance policy. Such a financial incentive could bias that professional’s advice.

Unfortunately, some sellers of dubious financial products gain the confidence and private financial information of their victims by posing as providers of estate or trust planning services.

The Estate Tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death. The fair market value of these items is used, not necessarily what you paid for them or what their values were when you acquired them. The total of all of these items is your “Gross Estate.” The includible property may consist of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets.

Once you have accounted for the Gross Estate, certain deductions (and in special circumstances, reductions to value) are allowed in arriving at your “Taxable Estate.” These deductions may include mortgages and other debts, estate administration expenses, property that passes to surviving spouses and qualified charities. The value of some operating business interests or farms may be reduced for estates that qualify.

After the net amount is computed, the value of lifetime taxable gifts (beginning with gifts made in 1977) is added to this number and the tax is computed. The tax is then reduced by the available unified credit. Presently, the amount of this credit reduces the computed tax so that only total taxable estates and lifetime gifts that exceed $1,000,000 will actually have to pay tax. In its current form, the estate tax only affects the wealthiest 2 percent of all Americans.

Most relatively simple estates (cash, publicly traded securities, small amounts of other easily valued assets, and no special deductions or elections, or jointly held property) do not require the filing of an estate tax return. A filing is required for estates with combined gross assets and prior taxable gifts exceeding $1,500,000 in 2004 – 2005; $2,000,000 in 2006 – 2008; and $3,500,000 effective for decedents dying on or after January 1, 2009.