Below are some questions that are frequently asked by clients of Kolesar & Leatham:
- 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?
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 other assets, such as homes and investment portfolios) 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 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, most businesses will run into situations where customers file bankruptcy.