Why should I separate or divide my California business assets?

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D. Michael Trainotti - Business/Corporate - Super Lawyers

Answered by: D. Michael Trainotti

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The recent Tax Cuts and Jobs Act has created a connection between income tax and the segregation of business assets. Essentially, it is advantageous in some cases to segregate your business assets by placing them in different entities. It can lead to lower tax rates.

One of the most sweeping changes involved in this act is the reform of the tax law surrounding pass-through businesses, such as sole proprietorships, partnerships, S corporations and limited liability companies taxed as partnerships or S corporations. Previously, owners of pass-through businesses like these paid taxes at their individual rate, which could reach as high as 37 percent. This made it financially unfeasible to separate parts of your business, as you would pay more in tax. Now, income tax on most pass-through businesses have a 20 percent deduction, making it more feasible to build out separate businesses under one umbrella.

Here is an example. A family runs a plumbing company, which they own and operate as an S-corp. The company provides retail plumbing services to homeowners and businesses, and owns several vans used to provide those services. The company also owns and operates a construction services division that provides plumbing installation for new buildings as well as renovations. The division of the company associated with construction operates with different trucks and separate personnel, and although both divisions are in the same building, there are separate entrances and signage for each. However, the building, vans, trucks, equipment and inventory are all owned and operated by the same company.

Recently, the family has become concerned that one of the vans, from either division, may be in an accident, which would expose the entire company to liability with their creditor who helped them purchase the vans. The family would like to structure the company’s assets in such a way that in the event of an incident like that, the company’s exposure to their creditor would be minimized.

The Solution Lies In The Segregation Of Business Assets

By establishing a new, parent S-corp, and transferring the stock of the historical operating entity to it, the family separates the retail plumbing operation from the construction plumbing business. The retail plumbing operation remains under the historical operating entity, retaining its inventory and share of the vans.

The rest of the vans are transferred to an LLC owned by the new parent S-corp. The construction division is transferred to another separate LLC, also a subsidiary of the new parent S-corp. Therefore, the value of the historical entity is legally reduced to the value of the inventory and the few vans operated by the retail plumbing operation.

Segregation of business assets is a good tool here because by separating out the assets, you are also separating liability. If one of the vans were to get in an accident, exposing the business to liability to a creditor, the creditor can only legally go after that part of the business to which the van belonged.

Disclaimer: The answer is intended to be for informational purposes only. It should not be relied on as legal advice, nor construed as a form of attorney-client relationship.

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