If you’re planning to start a business or expand an existing one, and didn’t have the good sense to be born wealthy, you probably need help scraping together enough money to get underway.
The U.S. Small Business Administration (SBA) is a federal agency that provides loan guarantees and other support to encourage small businesses. SBA loan programs are designed for business owners who may have trouble qualifying for a traditional bank loan.
SBA loan applications are structured to meet SBA requirements so that the loan is eligible for an SBA guarantee. This guaranty represents the portion of the loan that SBA will repay to the lender if you default on your loan payments. The guarantee allows the lender to accept a greater risk in funding a small business that may not meet conventional small business lending requirements.
SBA borrowers typically don’t have to make as big of a down payment and get more time to repay the loan than with conventional business financing. This means a fledgling business has more free cash for operations without being hampered by onerous debt service obligations.
3 SBA Programs for New or Expanding Businesses
SBA loans are offered in three programs for new or expanding businesses. If you’re ready to take the next step for starting your business in Oregon or Washington, it’s good to be prepared. Below are the 3 available small business loan programs.
• Basic 7(a) Loan Program
Eligible borrowers can use the 7(a) loan program, which is the most basic and widely used SBA business loan, to start, buy or expand a small business.
• Certified Development Company (CDC) 504 Loan Program
The CDC 504 loan program provides growing businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings.
• Microloan Program
The microloan program offers very small loans to start-up, newly established or growing small business concerns. SBA makes funds available to nonprofit community-based lenders which, in turn, make loans to eligible borrowers in amounts up to a maximum of $50,000.
Startup/Business Advice from James M. Hillas, P.C.
Starting a business or expanding your existing business is an exciting prospect, full of potential risk and reward.
If you have good credit and are looking to start or expand a business, you may consider whether an SBA loan is feasible for your situation.
If you’d like startup business advice from an experienced legal expert, reach out to James M. Hillas for a free consult today!
My friend and networking colleague Eric Williams of Codiligent, LLC also blogs on business transactions. A few years ago he posted an interesting blog entry about the impact of occupational fraud (embezzlement and other financial misconduct).
The blog entry focused on the 2010 findings of the Association of Certified Fraud Examiners (ACFE), which determined that the median occupational fraud loss was $160,000. Because business sale prices often are based on a multiple of earnings, fraud can result in potentially devastating reductions to the sale price of a business. Eric’s original post can be found here.
In 2012, ACFE updated its findings with a report that the median occupational fraud loss had dropped to $140,000, but more than a fifth of those cases involved losses exceeding $1 million. Among other key findings from the 2012 report:
• The median fraud reported to ACFE lasted 18 months before detection.
• Occupational fraud is more likely to be detected by a tip from an employee of the victim company.
• Occupational fraud is a significant threat to small businesses. The smallest organizations in our study suffered the largest median losses. These organizations typically employ fewer anti-fraud controls than their larger counterparts, which increases their vulnerability to fraud.
• The industries most commonly victimized are banking and financial services, government and public administration, and manufacturing.
• The presence of anti-fraud controls is notably correlated with significant decreases in the cost and duration of occupational fraud schemes. Victim organizations that had implemented any of 16 common anti-fraud controls experienced considerably lower losses and time-to-detection than organizations lacking these controls.
• Nearly half of victim organizations do not recover any losses that they suffer due to fraud.
This is an area of risk management that small businesses simply cannot afford to ignore. What precautions does your business have in place to avoid fraud?
Tuesday’s post discussed the tax implications to a buyer and a seller in an asset sale. Today we look at what happens in a stock sale.
If the business is structured as an S-corporation or a C-corporation, the seller and buyer can agree to a stock sale, whereby the legal entity is sold and the buyer gets all of the stock. Unlike an asset sale, stock sales don’t need to document the transfer of assets because the assets are (or should be) already owned by the corporation.
With stock sales, buyers don’t get a “step-up” in basis in the assets, because the assets have not been sold. The basis of the assets at the time of sale, or book value, sets the depreciation basis for the new owner. This means that the buyer doesn’t get the same depreciation benefits and thus may pay higher taxes than if the deal was structured as an asset sale.
Additionally, sellers often prefer stock sales because all of the proceeds are treated as capital gains, which usually means a significantly lower tax rate than if the proceeds were taxed as ordinary income.
Perhaps more importantly, buyers in a stock sale take on much more liability for unknown or potential claims against the business. These include future lawsuits, environmental cleanup responsibilities, payroll tax liabilities, employee claims, and other liabilities, all of which may become the responsibility of the new owner.
On the plus side for the buyer, a stock sale may be beneficial if the company has a few key vendors or customers, because there is less of a visible change in the company and thus less likelihood of losing critical business partners or accounts.
Stock sales require careful investigation by the buyer and accurate disclosures by the seller. Knowledgeable advisors regarding tax, legal, and other implications are critical to ensuring a successful transaction.
In an asset sale, the seller keeps the legal entity and the buyer purchases individual assets, such as equipment, fixtures, licenses, goodwill, trade secrets, trade names, telephone numbers, and inventory. Asset sales usually don’t include cash and the seller will often stay on the hook for company debt obligations. Accounts receivable and accounts payable may also be included in the sale.
If the business being sold is a sole proprietorship, a partnership, or a limited liability company (LLC), the transaction must be structured as an asset sale. If the business is incorporated (as a regular C-corporation or as a subchapter-S corporation), the buyer and seller can choose whether to structure the deal as an asset sale or a stock sale.
Buyers generally prefer to buy assets because this structure allows more flexibility in acquiring selected assets (and avoiding selected liabilities) while sellers typically prefer a stock sale to reduce taxes and reduce the paperwork of transferring ownership of each asset.
In an asset sale, the buyer gets a “step-up” in basis from the seller’s original basis. By allocating a higher value for assets that depreciate quickly (like equipment) and by allocating lower values on assets that depreciate slowly (like goodwill), the buyer can reduce corporate taxes in the future and improve the company’s cash flow during the early years of operation.
For sellers, asset sales generate higher taxes, because certain “hard” assets such as land, buildings, equipment, inventory, and promissory notes can be subject to higher ordinary income tax rates. As noted in our last post (Tax Traps for Business Sellers), ordinary income rates depend on the taxpayer’s income, and may exceed 43% for the highest bracket, compared to a 15% capital gains tax.
And if the business is a regular C-corporation, the seller faces double taxation. First, the corporation gets taxed on the sale of assets to the buyer. Then the shareholders of the company get taxed on the income and dividends received from the corporation.
Every business owner has a silent partner: Uncle Sam. And he plays a big role in the sale of a business. There are two tax considerations for the business seller regardless of what kind of entity is being sold:
• Will the income from the sale be taxed as ordinary income or capital gains?
Currently, ordinary income rates top out at 39.6%. Also for 2013, there is an Unearned Income Medicare Contribution Tax of 3.8% that applies to net investment income for taxpayers whose modified adjusted gross income exceeds $200,000 (for single filers) and $250,000 (for married filing jointly). Thus taxpayers in the highest tax bracket will face a combined 43.4% marginal tax rate on their investment income. The capital gains rate that most people and transactions fall into is 15%. That’s a big difference in rates. Naturally most sellers want to have the income reported as capital gains to obtain more favorable tax treatment. But how the income is treated (and thus taxed) depends on what kind of entity the company is, and how the sale is structured.
• When will the income from the sale be taxed?
Generally speaking, income is taxable when it’s earned. And when the income is earned depends on how the seller and buyer structure the payments. There are two types of sales when it comes to selling a business: a sale of corporate stock or a sale of the company’s assets. Each type of business entity (sole proprietorship, partnership, C corporation, LLC, and S corporation) has its own issues when it comes to the tax aspect of selling a business.
It’s important to analyze the potential tax consequences for the sale of your business early on. If you’re even thinking about a sale, be sure to consult with a knowledgeable CPA or business tax advisor to avoid making potentially expensive mistakes that give too much of the proceeds to your silent partner, Uncle Sam.