News & Events

Karl H. Schneider has been asked to speak at a title insurance agents’ forum sponsored by Old Republic Title Insurance Company on November 14, 2007. Mr. Schneider will address various litigation matters including foreclosure suits and attendant bankruptcy issues.

Congratulations to Attorney Trina N. Goethals who passed the Missouri Bar. Ms. Goethals practices in the areas of Litigation and Real Estate. A graduate of Central Missouri State University in 2000, Ms. Goethals received her law degree from Capital University Law School in 2005.

Converting a sole proprietorship into a corporation seems like a simple matter of filing Articles of Incorporation, issuing stock certificates and adopting By-laws. No need to pay the lawyers or CPAs more money, right? You risk some serious tax consequences by failing to plan your transaction appropriately.

A conversion from a sole proprietorship to a corporation raises several serious tax issues. As a sole proprietor, you are transferring assets (equipment, inventory, goodwill, etc.) to your new corporation in exchange for corporation stock.

Internal Revenue Code Sec. 351 provides that an exchange of property for stock in a corporation is a nontaxable event only if certain requirements are met. On the surface, the requirements are simple: 1) A transfer of property made by one or more persons who have or will have control of the corporation immediately after the transfer as a result of the exchange (the capital contribution). 2) The only consideration received is common stock or preferred stock that is “nonqualified preferred stock.” 3) There must be a business reason for the transaction.

Traps for the unwary manefest in many forms. For example, the assumption of debt by the new corporation in exchange for stock can be problematic. While the IRC allows for the assumption of debt without a tax consequence, if the principal purpose of the liability assumption is to avoid federal income tax on the exchange or if there is no bona fide business purpose for the debt assumption, the entire liability is treated as boot. The value established for the boot is taxable.

Even if neither of these exceptions is present, if liabilities assumed exceed the total adjusted basis of the property transferred, gain is recognized to the extent liabilities assumed exceed the basis of the property transferred.

The Tax Court and the Federal Circuit Courts are divided on how to treat a personal not transferred as property to a corporation. If this is the type of transaction you are contemplating currently, you should seek the advice of tax counsel.

Another taxable transfer is property transferred to an “investment company”. The determination of whether a company is an investment company shall be made by taking into account all stock and securities held by the company, which can include money, stocks and other equity interests in a corporation, evidences of indebtedness, options, forward or futures contracts, notional principal contracts and derivatives, any foreign currency, any interest in a real estate investment trust, a common trust fund, a regulated investment company, a publicly-traded partnership or any other equity.

One of the most common traps I see in my practice is the transfer of services for stock. Services are not property. When an individual receives stock for future or past work performed, it is a taxable event for the individual. Recall also the requirements for the tax-free exchange for the corporation requires that the transferor of property must own the company after the transaction. Services are not counted as part of the control requirement. Therefore, transfers of services for at least 20% of the stock means the control test is not met. The entire transaction is taxable.

If you are contemplating starting a corporation from your existing sole proprietorship, adding shareholders, or any other stock related transaction, use the following planning guide:

• Have an attorney form the corporation and draft the bylaws and a shareholders’ agreement.


• Issue the stock to the sole proprietor upon transfer of the assets and execution of the applicable documents.


• Obtain appraisals of all property contributed to the entity or otherwise document the valuation.


• Consult with your tax advisor and/or CPA regarding an S corporation election.


• Determine whether any gain will result if liabilities are assumed in excess of basis.


• Have an attorney review loan documents to be sure the assumption of debt, or even the transfer of debt, is allowed. Obtain lender consent, if necessary.

Make sure the RESULTS you intend are the RESULTS you get. Plan appropriately for your stock transaction and avoid the traps of the tax code by obtaining expert advice.

Ohio offers consumer protection in several different types of transactions. For instance, there is a Lemon Law for new car purchases which allows a buyer to bring a claim against the vehicle’s manufacturer if the buyer has experienced problems within the first year or first 18,000 miles of delivery. The problems must substantially impair the use, value, or safety of the car and must have been reported to the manufacturer within the first year or 18,000 miles.

Protection is also provided to consumers under the Consumer Sales Practices Act, the Telephone Solicitation Sales Act, the Home Solicitation Sales Act, as well as legislation including but not limited to automobile repairs, home mortgages, credit cards, store refund and return policies.

Despite a popular belief that consumers have a right to cancel a contract within 3 days of signing, no such right exists. Some exceptions which allow cancellation within 3 days under certain circumstances include mortgage refinance contracts, sales made to a consumer in the consumer’s home and prepaid entertainment contracts. Buyers should consult an attorney before signing any contract.

While consumer protection laws exist, buyers still need to exercise care when signing contracts; whether it is a credit card receipt for an in-store purchase or a contract to buy a home.