Strategic Tax Management

ACT 123
Chapter 3 Chapter 3: CHOOSING A LEGAL ENTITY, RISK
MANAGEMENT, RAISING CAPITAL AND TAX
MANAGEMENT

 Apply SAVANT to Entity Choice

1. Determine application of the Framework in specialized legal forms
2. The entity choice for tax purposes should be based on a strategic planning process that considers
a host of nontax strategic goals as well. Considering the entity’s strategic plan, they have to
consider also those non-tax attributes such as:

Week 4
Chapter 3 Chapter 3: CHOOSING A LEGAL ENTITY, RISK
MANAGEMENT, RAISING CAPITAL AND TAX
MANAGEMENT

Week 4
Chapter 3
Overview

1. Risk Management
2. Managerial Control
3. Raising Capital
4. Pretax Return

Week 4
Chapter 3
Capital Raising

 Raising capital essentially means getting the money you need to grow your business from investors.
Raising capital is another way of talking about financing your business. You can raise capital through
investors, or you can take out debts, like loans or credit cards, to finance your business venture.

 When most people think of capital in business, they think of tangible assets, like manufacturing
equipment or the building that’s used to manufacture goods. It’s true that these are forms of capital.
But capital also refers to financial assets, including funds that are held in an account, that are used to
build wealth in your business. Note that materials that are consumed or used as part of a process
aren’t capital.
 Capital as investments that generate wealth and can be sold off can be a brand name or software.
Also, a piece of manufacturing equipment because it will generate wealth and can be sold off as
assets. Equipment is still capital, even though it depreciates in value. Equity capital in the form of
investments doesn’t have to be paid back and is used to grow wealth in the business.

Week 4
Chapter 3
Management Control

 Unlike in a sole proprietorship which he has the sole control of the business, the other type
of business such as partnership and corporation invites more decision makers that will
make judgment on the firm’s venture. Thus, they will all be decision makers responsible to
the path where the business will go. Investors and shareholders are able to have a voice
only through voting. From there, the latter has to choose who will represent their voices.

Week 4
Chapter 3
Anticipation and Timing Issues

 In a corporate setting, it can control the timing of income to its shareholders. For example,
a corporation normally can choose not to pay dividends. (Similarly, the corporation can
choose to repurchase its shares rather than paying dividends.) This allows shareholders to
control when to reap the benefits of corporate earnings in their decisions about when to sell
shares but they have to consider the probable imposition of improperly accumulated
earnings tax.

Week 4
Chapter 3
The SAVANT FRAMEWORK

 For example, you and your friend want to start a business. Putting it all together: Raising
Capital and Management Control. Let us use the SAVANT Framework for better
understanding.

Week 4
Chapter 3
Putting up a business.
Strategy
 In order to retain control, you probably invite other people to raise capital but not to
include them as partners but rather investors to the firm. In some cases, a limited partner
may be true but then again, this kind of partner may exercise certain control in the
management of the business.

Week 4
Chapter 3
Putting up a business.
Anticipation
 In anticipation of a new tax law change, you probably retain or rather put up an Ordinary
Partnership rather than a General Professional Partnership for better tax set up. This can be
assessed through allowed deductibles and difference in tax rates for income purposes.

Week 4
Chapter 3
Putting up a business.
Value-Adding
 Ordinary Partnership is treated as an ordinary corporation. For every business transaction,
the way a corporation does is no way different except the absence of shares of stock. In
this regard, one could think that a good financial performance will reap better benefits
minus the various tax types a corporation is more exposed. To recap, an ordinary
corporation, though the same tax rates of 30% is relieved of paying dividends, IAET and
the like. This can help add value to the firm as the business transaction are basically the
same as if a corporation.

Week 4
Chapter 3
Putting up a business.
Negotiating
 Because of the nature of the business, you anticipate tax net operating losses for the first
few years just like a corporation. Though there is no difference in tax exposures, one could
think that an Ordinary Partnership will have better standing as it has less tax types to pay
and not as complex as a corporate set-up.

Week 4
Chapter 3
Putting up a business.
Transforming
 In the event of liquidation, an Ordinary Partnership has to liquidate only the assets and
distribute the remaining assets to the Partners once the creditors are paid and settled. In a
corporate set-up, the shareholders are the last to be paid up once the secured and unsecured
creditors are settled. One could imagine the difficulty of liquidating a corporation than
ordinary partnership. Also, as an ordinary asset, it can be deduced that any losses may be
deducted to other ordinary losses unlike in a corporate set-up where shareholders treat their
earnings as a passive income. This is not deductible but an income subject to final taxes,
hence, will never be deductible.

Week 4
End