Kolesar & Leatham Answers Frequently Asked Questions

What are some of the major risks in running a business in Nevada?
What kind of tax liabilities do I have to worry about in my business?
What is bankruptcy and how does it affect business?
Is it true that someone can only file for bankruptcy once every seven years?
What does it mean to be upside down?
How does the lender decide the maximum loan amount I can afford?

1. What are some of the major risks in running a business in Nevada?

There is no such thing as a business venture without risk. The risks involved can come in many forms. The possibility that you could go out of business and lose all of your investment—and possibly much more—is always there.

Businesses are subject to market risks from competition and the economy in general. From a legal perspective, preventable problems that most often bring down businesses include the following:

Failing to comply with licensing requirements or other regulations
Lax internal procedures and accounting standards for payables and receivables
Labor and employment issues, including sexual harassment or discrimination claims
Underestimating or failing to pay tax liabilities including payroll taxes
Disputes among co-owners
Getting buried in litigation and judgment costs as a result of an "out of control" law suit
Criminal liability exposure for violating laws regulating your business

Many business people do not plan for the risks if their enterprise fails. Once a business is in trouble, planning will ultimately determine whether bankruptcy can be avoided.

These risks may include personal liability exposure for the following:

Personal guarantees on bank loans and other obligations of the business, including payroll taxes
Unpaid taxes assessed against the business, including interest and penalties
Other continuing or long-term obligations of the company such as office and equipment leases
Pending lawsuits in which you are named personally as a plaintiff or defendant
Investigations by governmental agencies

All of these risks only underscore the need for proper planning before you go into business. This planning should include choosing the proper business structure to shield you from the potential liabilities of operating a business.

2. What kind of tax liabilities do I have to worry about in my business?

If you are a first-time business owner or operator, the taxes levied on your business could well be surprising. There are federal, state, and local taxes assessed against every business, and you may be held personally liable for certain of these taxes. These taxes include the following:

Business license, permit, and application fees (essentially taxes on the cost of doing business)
Payroll taxes and withholdings (both employer and employee portions)
Excise taxes on products, goods, or services (e.g., petroleum products)
Franchise taxes (for the privilege of doing business)
Sales and use taxes
Property taxes
Federal and state income taxes (personal and corporate)
Federal and state capital gains taxes (personal and corporate)
Penalties and interest that accrue on taxes that are not timely paid

Failing to pay payroll taxes is a classic example of where many businesses get into trouble. As an employer, a business has the responsibility for withholding certain taxes from an employee's paycheck (for example, income tax withholdings, social security, federal and state unemployment and disability taxes).

These are not the employer's money and the employer is responsible for collecting them on behalf of the government. The IRS and other tax authorities are very unforgiving about failure to pay these withholdings in a timely manner. In addition, the employer is responsible for the business's portion of Social Security and other payroll taxes that must also be paid on time. If the employer fails to pay in these taxes and withholdings, penalties can be assessed against the owners and/or managers of the business up to 100 percent of the amounts owed.

3. What is bankruptcy and how does it affect business?

While technical definitions of bankruptcy can vary, the term refers to a situation where an individual or a business has liabilities that exceed assets, or where the person or business cannot meet financial obligations as they become due.

Virtually anyone or any type of business entity can start a bankruptcy proceeding by filing a petition in federal bankruptcy court. One who files a petition is called a bankruptcy debtor.

The filing of a bankruptcy petition affects all creditors of the debtor. There are many different categories of creditors, including the following:

Secured creditors (usually those with a lien on a debtor's property)
Unsecured creditors (usually vendors, credit card companies, and anyone else who doesn't have a security interest in the debtor's property)
Judgment creditors (usually those creditors who have sued and obtained a judgment against the debtor prior to the bankruptcy being filed)
Creditors with super priority claims (who have higher priority over other creditors because of special rules or proceedings within the bankruptcy)
Creditors with administrative claims (usually creditors such as accountants or lawyers with claims that are given priority because they assisted in the bankruptcy in some manner)
Post-petition creditors (who have extended credit to the debtor after the bankruptcy has been filed. Bankruptcy generally covers only pre-petition debts (those that were outstanding at the time the petition was filed.))

Inevitably, every business will run into situations where customers file bankruptcy.

4. Is it true that someone can only file for bankruptcy once every seven years?

No. This is a common misinterpretation of the rule. The court will deny a discharge if the debtor received a discharge under Chapter 7 or Chapter 11 in a case filed within eight years before the second bankruptcy petition is filed or if the debtor previously received a discharge in a Chapter 12 or Chapter 13 case that was filed within six years before filing the second case.

If the debtor can show that all the unsecured claims in the earlier case were paid in full, or the debtor made payments totaling 70 percent of the allowed secured claims, the plan was proposed in good faith, and the payments represented the best efforts of the debtor, the debtor may not have to wait that long for a second discharge. A debtor is not eligible for discharge under Chapter 13 if a prior discharge was received in a Chapter 7, 11, or 12 case filed within four years before the current case was filed, or in a Chapter 13 case filed two years before the current case.

There are other strategies that debtors can use as well. For example, you can file a Chapter 7 to discharge those debts that are dischargeable, and file a subsequent Chapter 13 to repay those debts that were not discharged in Chapter 7.

5. What does it mean to be upside down?

The concept of upside down applies to the relationship between a borrower, its bank and the collateral for a loan. Unfortunately, in many instances, even though the owner will pay a substantial down payment (e.g. 25 percent) when they first finance their home or car, the value of the collateral can and does go down. For example a car may depreciate as much as 25 percent just by being driven off the new car lot. Similarly in a recessionary environment, the expected appreciation of a house does not materialize and the value of the house depreciates to less than the amount of the mortgage. If you owe more on a financial obligation than the market value of the security, then you are considered to be upside down with respect to that loan.

6. How does the lender decide the maximum loan amount I can afford?

The lender considers your debt-to-income ratio, which is a comparison of your pre-tax income, to housing and non-housing expenses. Non-housing expenses include such long-term debts as car or student loan payments, alimony, and child support. According to the Fair Housing Administration (FHA), monthly mortgage payments should be no more than 29 percent of gross income. The mortgage payment combined with non-housing expenses should total no more than 41 percent of income. The lender also considers the amount of cash available for down payment and closing costs, credit history, and so forth when determining your maximum loan amount. Unfortunately, in today’s market, the formula for determination of how much a lender will lend is a function of the credit available in the marketplace. It is not unheard of for a borrower with “perfect” credit to be turned down for a loan since the lending institution does not have the capital resources to make the loan. In those instances, you might need introduction to an alternative lending source.

Contact Us

If you have questions or are in need of sophisticated legal representation, contact Kolesar & Leatham today by calling 702-997-8358 or sending an email to mailto:info@klnevada.com.