Odd situation - need advice for planning etc.

[rkhan71]

Picking up a client where business is in mom's name with son on bank account too. Son had to put business in mom's name due to son not having enough business experience, etc. Son and wife have another similar business where they perform the duties of the first business, in mom's name and want to get paid for that work. They have other clients in their own business and do work for this one.

My concern(s) are about son and wife doing work for the business in mom's name, mom having no working part in the situation, and kids wanting remuneration from their efforts for administration and marketing efforts.
So, I am wondering about the passive situation of mom, son being on the bank account with mom on mom's business, and son and wife trying to get paid for the work that they perform for mom's business, where son and wife expense mom's business.

In summay, mom's business is really son and daughter's business but they could not get approved because of policies in place from licensing company. This is quite convoluted and need help with best way to handle accounting, tax, and intangible ideas of keeping an arm's length transaction and satisfying the IRS and all.

Sorry for any circular questions or comments.

Thanks for your help in advance.

[DaveinTexas]

Oh no he didn't!!

I tell new clients like it is and am very direct and precise with my advice so there is no confusion and I can avoid having to explain myself later when they are asking me, "Why didn't you tell me this could happen?!?"

I would tell them they are putting their Momma, who changed his diapers when he was a baby, at risk especially if this business is a sole prop (that wasn't mentioned in the post). I am not sure what "put the business in the mom's name" means but I assume this means they registered the DBA in her name possibly?

Momma "operates" the business as the licensed proprietor, sonny boy fouls up a contract, doesn't deliver as promised, runs up the credit line (insert worse case scenario) and Momma is left with a lawsuit against her personally (whether or not a sole prop) and all the while Momma has nothing to show for it because the son has stripped the business of all the profits and has no risk exposure because the business is in Mom's name.

Tell them this idea stinks. I speak from experience. Client owned a business inherited from husband who passed away. Sonny boy opens Amex card in Mother's name and runs it up to the tune of $90,000+. Mother just wanted to sell the business to begin with but sonny boy just knew he could grow the business because he was so SMRT. Guess who was left with a $90,000 balance on her "business" credit card and getting threatening legal action letters? Son has not ever made attempt to repay the debt and doesn't even feel it was his responsibility to do so.

I would refuse to take the new client unless they operated this business as a legal entity (think LLC), get a lawyer involved so it is properly created and operating agreement is tailored to the client's needs. If a credit card is needed, let the son get one is his name so he is solely responsible. If the client doesn't like the advice, I would tell them I couldn't help them. Saves a lot of heart ache.

[Gary2]

As Dave indicated, please first explain it with terms more precise and exact than "business in mom's name." If Moe buys the exclusive distribution rights to Acme Trinkets, and then hires Larry's Trucking to do distribution in the east end at a fixed fee per delivery, and Curly's Trucking to do distribution in the west end at 20% of revenue, which one of them is in the distribution business? All three? And does Acme Trinkets really care that Moe farmed out the work? A "business" is an abstraction; it has no meaning for tax questions, and very little for legal questions.

You mention "licensing company." Does that mean it's a franchise? Or some other business deal? Are you concerned about violating the terms of the license (a legal issue)? The liability issues? Or are you concerned about the implied legal structure for tax purposes? Sole proprietorship with son as employee? Partnership? Something else?

[rkhan71]

Foolwup Dave & Gary

Thanks for responding.

Dave:

I would tell them they are putting their Momma, who changed his diapers when he was a baby, at risk especially if this business is a sole prop (that wasn't mentioned in the post). I am not sure what "put the business in the mom's name" means but I assume this means they registered the DBA in her name possibly? It is a DirecTV type franchise and the son was not able to put in his name. He has since formed an LLC in business name

Momma "operates" the business as the licensed proprietor, sonny boy fouls up a contract, doesn't deliver as promised, runs up the credit line (insert worse case scenario) and Momma is left with a lawsuit against her personally (whether or not a sole prop) and all the while Momma has nothing to show for it because the son has stripped the business of all the profits and has no risk exposure because the business is in Mom's name. I have already mentioned this scenario to him and he says that he is careful about his business dealings. All one can do is tell and the rest in the hands of the individual.

Tell them this idea stinks. I speak from experience. Client owned a business inherited from husband who passed away. Sonny boy opens Amex card in Mother's name and runs it up to the tune of $90,000+. Mother just wanted to sell the business to begin with but sonny boy just knew he could grow the business because he was so SMRT. Guess who was left with a $90,000 balance on her "business" credit card and getting threatening legal action letters? Son has not ever made attempt to repay the debt and doesn't even feel it was his responsibility to do so. They are already there; there is no turning back; the wheel is in motion, and now they just have to cross t's and dot i's. That is where I keep them on track; this is why they called me and are seeking help. They just want to get paid by the source - mom's business for work performed - invoicing and all.

I would refuse to take the new client unless they operated this business as a legal entity (think LLC), get a lawyer involved so it is properly created and operating agreement is tailored to the client's needs. If a credit card is needed, let the son get one is his name so he is solely responsible. If the client doesn't like the advice, I would tell them I couldn't help them. Saves a lot of heart ache. I am thinking that the business is operated legally, it is just in mom's name and they work the marketing and administrative aspects of it. Just need to know how to treat the bookkeeping and such. This is why I am seeking assistance of ideas.

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Gary:

As Dave indicated, please first explain it with terms more precise and exact than "business in mom's name." If Moe buys the exclusive distribution rights to Acme Trinkets, and then hires Larry's Trucking to do distribution in the east end at a fixed fee per delivery, and Curly's Trucking to do distribution in the west end at 20% of revenue, which one of them is in the distribution business? All three? And does Acme Trinkets really care that Moe farmed out the work? A "business" is an abstraction; it has no meaning for tax questions, and very little for legal questions. Mom opens DirecTV in her name because son cannot. He is taking care of it, and on bank account with her. She is passive and does nothing; she is 400 miles away. He just needed her name to start the business. Son and wife do marketing and administrative and want to be paid, so I want to make sure we have an arm's length transaction when doing the activity and bookkeeping, etc. Am I missing anything is my question to advise these people.

You mention "licensing company." Does that mean it's a franchise? Or some other business deal? Are you concerned about violating the terms of the license (a legal issue)? The liability issues? Or are you concerned about the implied legal structure for tax purposes? Sole proprietorship with son as employee? Partnership? Something else? I am concerned about an audit if it occurs and the IRS being okay with the income and expenses being treated okay with this sort of setup. I want it to have clearness as a tax structure. It does not matter about the legal; I believe they are fine in that department. I do not want the IRS saying you did not do this or do that and try to remove certain entries and reclassify causing some tax and reporting issues which will cost them money after an audit. The present firm is a sole prop in mom's name. Son formed an LLC which will eventually be done through that entity - sole prop LLC.

Thanks, again.

[DaveinTexas]

That was a lot of copying and pasting

The entity is already setup, LLC, in Mother's name, I got it. If Momma is sole member then the default taxation is a sole prop unless they elect Corporate taxation (S or C).

I think any payments to son and wife need to be wages and justified/reasonable. Sonny boy can't expect to take profits arbitrarily. They need to have some kind of a budget or income/expense projection to determine the profit level so wages paid to son and wife don't strip all of the cash out of the business.

The main issue with operating this company as a sole prop is even though the Mother is not active in the business and it maybe that this business is a passive activity, she will still pay SE tax on profits and losses are not deductible. An S Corp has the same problem, no SE tax but profits are taxed (flow through) to Mother, losses are not deductible. She could draw profit distributions and escape scrutiny for not earning a wage (no services rendered).

Or maybe C Corp taxation is the answer, profits are taxed at Corporate level, paid by Corporation and Mother has no worry of pass through income. High salaries for reduce profits may draw scrutiny sir you want to plan carefully and document justification for salaries to son and wife, and include a plan to pay dividends to Mother (for headaches and heartaches to come). Dividends may be taxed to Corp but Mother (if she is in 15% tax bracket or lower) won't pay any tax on the dividends (qualified). The first $50,000 is taxed at 15% to the Corp, not too bad if you can control profits at that level.

Either way you choose I strongly suggest you do some reading in the TaxBook (specifically the entities section). I really don't mean that disrespectfully, but this is what helped me pass the business section of the EA exam so I know it will help you too.