Involuntary Forfeiture of Corporate Privileges

Imagine a small automotive service shop owned by a man named Jason. The shop is run by Jason and his immediate family and has enjoyed moderate success over the past few years. Eventually, the shop develops a reputation for quality work and begins to see higher profile clients with more money at stake. In response, Jason decides to operate the auto shop as a registered limited liability company (LLC) and lists the shop as the primary place of business. Everything runs smoothly and he even decides to open a second location with new equipment and over time, starts to run operations from that location. A year passes and a former client files a lawsuit against the auto shop, seeking not only company assets, but also Jason’s personal assets.

The phrase “piercing the corporate veil” is mysterious, alluring, and like many things in the legal field, relatively meaningless.  It should, however, make business owners pause and take stock of their filings. Many limited liability companies (LLCs) are formed not only to streamline business operations, but also to protect personal assets. Ordinarily, if a company falls on hard times or fails for various other reasons, the owner(s) will be shielded from liability for the company’s outstanding debts or obligations. Unfortunately, there are several ways of losing these protections. If that happens, the owner’s personal assets can be vulnerable to claims again the LLC.

The State of Texas refers to the corporate veil as “corporate privileges,” and the State revokes them when owners neglect to file certain forms or pay franchise tax. Revocation of corporate privileges can be done by the state as a one-step process under Chapter 11 of the Texas Business Organizations Code or as a two-step process under the Tax Code. While both options are available, the Texas Secretary of State typically revokes  corporate privileges under the Tax Code. In that case, the Texas State Comptroller will first provide notice of forfeiture for failure to file a required report or pay franchise tax or penalty. Second, the Secretary of State will then forfeit the entity’s charter or certificate if that entity has not revived its privileges within 120 days after notice of forfeiture.

If a company’s corporate privileges are forfeited, the company will be denied the right to sue or defend in state court and each director or officer will be liable for the debt of the company. While the prospect of forfeiture may sound grim, avoiding it is a fairly easy process. Business owners should diligently file their initial report, annual reports, public information reports, and franchise taxes with the Comptroller and check the Secretary of State’s records to ensure those forms were recorded.

Returning to Jason, luckily for him, he still had time to revive his corporate privileges, ensuring he could protect his personal assets from any collection efforts should he lose the coming lawsuit.

by guest blogger Henry Knight

How to Deduct Entertainment Expenses Part 2

Can I deduct my wife´s dinner?

Ian is a software engineering consultant who works for a small firm of which he is a 25% owner. He much prefers working at his computer to going out on the town, but occasionally he finds it necessary to take clients or prospective clients to dinner.

“I can talk about software technology all day,” he told me, “but I´m a bumbling buffoon when it comes to socializing. The only way I manage to get through those ordeals where I´m supposed to wine and dine a client is to take Susan [Ian’s wife]. She´s just incredible. She can talk to anybody about anything. So … since the client would have a terrible time with just me there, can´t I deduct my wife´s dinner?”

The rule is that the cost of the dinner for both the host’s and the customer’s or client’s spouse is deductible if it´s not practical to entertain the client or customer without his or her spouse. But Ian needs Susan at dinner, regardless of the presence or absence of his client´s wife. Can Ian deduct the cost of Susan´s meal, even if the client comes alone? IRS would be likely to challenge this — the greater the amount deducted for Susan´s meals, the more likely it would be of interest to IRS.

For deductions of this sort that do not fit neatly within a section of the Tax Code or Treasury Regulation, you would want to have extra documentation. For example, Ian´s firm might want to record minutes of a meeting where they discuss the need for Ian to entertain clients and prospects, together with Ian´s difficulties in social situations and Susan´s social skills. If the other partners in Ian´s firm agree that Susan´s presence at client dinners will be very likely to help the firm increase sales and retain existing clients, it would be difficult for IRS to argue convincingly that the cost of Susan’s meals is not an ordinary and necessary business expense.

When is entertaining not entertainment?

In general, the deduction for meals and entertainment expenses is 50% of what you actually spend (75% for the transportation industry). But in some cases, the cost of a meal looks a lot more like a regular business expense than an entertainment expense.

Allan has a weekend business leading walking tours in Manhattan. A regular feature of each tour is a box lunch or snack pack for each participant, included in the price of the tour. In Allan´s case, the cost of lunch and snacks is 100% deductible, as Costs of Sales or Customer Supplies.

Likewise, for film or music critics, travel agents, food critics, certain costs that would ordinarily be 50% deductible as entertainment expenses are 100% deductible as regular business expenses. As always for costs of activities that people generally do for fun and pleasure, it is important to have abundant documentation of your profit motive and the relationship between the activity and the business. Calling yourself a film critic because you view lots of movies and tell your friends about them is probably not going to fly

How Government Regulation Stifles Creation of Jobs

This is a blog entry posted by a Hungarian entrepreneur:

He explains that he would not hire a woman, because the cost of required maternity leave is prohibitively expensive; nor would he hire someone over 50, because he would not be able to fire the person if the person did not perform the work adequately.

This is an extreme example of the harmful effect of government interference with the right of employers and employees to enter into agreements.

When laws raise barriers against small businesses rather than creating a system that fosters the freedom of business owners to contract freely with people who wish to work for compensation, the end result, when the barriers get too high, is a situation in which the only thing keeping the economy going at all is the black market.