My name is Arthur D. Warady, and I have practiced law for 50 years. I am also a certified public accountant (CPA), and I have been an entrepreneur in software development and other fields. Below are some common questions and concerns that my business clients raise. To address your specific situation, contact my Florida law firm, Arthur D. Warady, to arrange a consultation.

Can a Loss on the Sale of Small Business Corporation Stock be an Ordinary Loss?
Section 1244 of the Internal Revenue Code of 1986, as amended, allows up to $100,000 of the loss on the sale of stock (which includes the stock becoming worthless) of a Small Business Corporation in any one tax year to be deducted in full against Ordinary Income (an Ordinary Loss), instead of being offset against Capital Gains. If the loss exceeds the limit under Section 1244, the excess will be a Capital Loss. Generally, Ordinary Income is taxed at a higher rate than Capital Gains. This means that a deduction against Ordinary Income saves more in income taxes than a deduction against Capital Gains.

Want to Learn More? Go to Arthur’s BLOG on the same topic.

• Generally, claims for liabilities arising “inside” an LLC cannot reach a member’s assets owned “outside” the LLC.
• On the other hand, in virtually all states, with the exception of Delaware, Nevada, and Wyoming, assets inside a single-member LLC (in contrast with a multi-member LLC) are not protected from liabilities arising outside the LLC.
• Delaware, Nevada, and Wyoming are the only states that provide a single-member LLC with the same liability protection as a multi-member LLC.
• It is possible to establish a Wyoming LLC to own assets located outside of Wyoming. I prefer Wyoming because it is less costly to establish and maintain a Wyoming LLC than in Delaware or Nevada. However, it’s important to verify the laws of the state in which the assets are located. You might be required to register the LLC as a foreign entity doing business in the respective state.

• No, there are technical requirements that must be met to make a contract legally enforceable – for example, the party seeking to enforce the contract:
  • Must prove that the other party received legal consideration for signing the contract; and
  • Must prove that its promises to the other party were not illusory.

• Yes, many states have a law called “the Statute of Frauds” that specifically validates some verbal contracts
• Even if a verbal contract is not protected by the Statute of Frauds, various facts and circumstances may make it legally enforceable, such as when the party seeking to enforce the verbal agreement has performed its obligations to the other party.

• Sometimes, yes.
• If a shareholder-employee earns enough income, then the accountant might declare part of the income to be W-2 wages and the balance to be a distribution of an S-Corp dividend.
• The W-2 wages portion is subject to payroll taxes, including FICA (Social Security) and Medicare taxes
• The S-Corp dividend is not subject to payroll taxes.
• The audit risk for the shareholder-employee is that if capital is not a material income-producing factor of the business, then the IRS or state revenue department may determine the salary to be unreasonably low, reclassify part or all the dividend as salary and assess penalties for failure to pay payroll taxes.
• On the other hand, if the LLC keeps its default classification as a disregarded entity or partnership, then the IRS will classify all income of the LLC as self-employment, which is subject to self-employment tax but not other payroll taxes.

• Effective September 4, 2024, the tried to invalidate virtually all Covenants Not To Compete. The Courts struck down the FTC Rule on Covenants Not To Compete.
• Today, enforceability of a Covenants Not To Compete remains subject to regulation under State Law.
• State Laws vary. 
• Generally, courts are reluctant to enforce a Covenants Not To Compete because it is a restraint on trade.
• In most states, a court is less likely to enforce a Covenants Not To Compete entered into by an employer attempting to stop an employee or independent contractor from engaging in employment that competes with the business of the employer, than if it is a Covenants Not To Compete that is entered into in connection with the sale of a business.
• For more information on this topic, see my Blog on this Website. 

• “Flow-through entity,” also known as “pass-through entity,” is a term invented for federal income tax purposes. It is not a specific legal entity.
• The term includes a class of entities whose income is not usually taxable to the entity but rather is taxed to the entity’s owner(s).
• An S-Corp, a partnership, and a limited liability company (LLC) that is taxed as a partnership are examples of flow-through entities
• A C-corp is not a flow-through entity.

• This depends on a number of factors:
  • If the LLC is elected to be taxed as a corporation, then generally it would be taxable income if a C corporation. If an S-Corp, it may or may not be taxable depending on other circumstances.
  • If the LLC is taxed as a partnership (the default tax classification), then generally, no, the distribution to the retiring member would not be taxable income, though there are some technical exceptions.

• A state nonprofit corporation may be exempt from that state’s income tax or sales tax – if properly registered; however, it is not exempt from federal income tax, and donations to it are not deductible on the donor’s federal income tax return.
• All 501(c)(3) organizations are state nonprofit corporations or trusts, but not all are recognized as exempt from federal income taxes unless approved by IRS based on an application for income tax exemption submitted to and approved by the IRS.
• If approved, IRS issues a favorable Determination Letter as evidence that a nonprofit has been approved as a 501(c)(3) organization.
• Contributions to most Section 501(c)(3) organizations are deductible on the donor’s federal income return if that characteristic is included in the organization’s Determination Letter.