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Chapter 11 Reorganization in North Carolina

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There are many forms of reorganization and bankruptcy, but not all are available to – or make sense for – small businesses. Due to recent changes in the law, however, a Chapter 11 reorganization, which used to be somewhat challenging to access for many small businesses, has become much more accessible. 

Here, we discuss what a Chapter 11 reorganization is, the benefits of one to a small business, and the beneficial changes in the law that have recently been made. 

What is a Chapter 11 Reorganization, and What are its Potential Benefits?

In short, a Chapter 11 reorganization is a process that enables a business to reorganize and continue to operate despite financial struggles. More specifically, a Chapter 11 filing provides for the following:

  • Automatic Stay Protection: The automatic stay is a bankruptcy law mechanism that forecloses creditors from collecting on the small business debtor’s debts. Litigation is put on hold, lenders cannot proceed with foreclosures, and sales of business assets are also put on hold. 
  • Rejection of Unfavorable Contracts: A small business debtor can reject unfavorable contracts, such as a rental lease, allowing him or her to leave a rental location with above-market rent that is no longer financially feasible. 
  • DIP Loan access: A small business debtor can borrow money through access to a debtor-in-possession, or DIP, loan. These loans allow lenders to obtain super-priority liens, putting them first in line before the small business debtor’s existing lenders (making these loans very appealing to a lender and, therefore, opening up more credit availability to debtors).
  • Asset Sales: Further, a small business debtor can sell its assets (such as equipment, machinery, and other property) free and clear of liens and claims (liens will, however, attach to the proceeds of the sale).
  • Debt Reprieve: Finally, a small business owner facing financial struggles can find relief through a debt reprieve. This means that the business owner can seek to take a break from paying pre-bankruptcy debts. This allows the business to direct money to more urgent needs or to build up a cash reserve. While the debts will need to be paid back eventually, the temporary reprieve can offer breathing room for the business. 

The Small Business Reorganization Act of 2019 

While the benefits above may sound too good to be true, until recently, many small businesses have been unable to take advantage of a Chapter 11 reorganization because of certain restrictions and high expenses involved in a filing. 

The Small Business Reorganization Act (SBRA), which went into effect on February 19, 2020, aimed to address some of the issues preventing small businesses from taking advantage of a Chapter 11 reorganization. The SBRA created a sub-chapter V of the Bankruptcy Code, which has the main objective of allowing small businesses to quickly and inexpensively emerge from bankruptcy with a court-approved plan of reorganization. 

Here are just a few of the many changes the SBRA made:

  • Continued Ownership: allows small business debtors to retain a stake in the reorganized entity, so long as the ultimate reorganization plan is fair and equitable. The debtor’s management may also continue to operate the business. 
  • Plan of Reorganization Confirmation: holds that creditors no longer need to confirm a small business debtor’s plan of reorganization, as long as they meet certain requirements. This means that small businesses will no longer have to negotiate with creditors regarding payments, saving both time and money.
  • Appointment of a Trustee: provides that a trustee is appointed and will act to facilitate the reorganization and assist the small business debtor with following its plan of reorganization. 
  • Streamlined Process:  removes procedural hurdles and many of the costs associated with corporate reorganizations.
  • Delayed Payment of Administrative Expense Claims: provides that the small business debtor is no longer required to pay administrative expense claims on the effective date of the plan. Instead, business owners are permitted to pay these administrative expenses claims throughout the term of the reorganization plan. 

Further Benefits Implemented by the CARES Act 

The SBRA provided for a small business, which it defined as a business with debts in an amount not greater than $2,725,625, to restructure its debts through the more cost-effective Chapter 11 process. However, many small businesses did not qualify because they carried too much debt.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) amended the SBRA to increase the debt limit for debtors filing a Chapter 11 reorganization under subchapter V of the Bankruptcy Code. The debt limit was increased to $7.5 million, allowing for more debtors to take advantage of the streamlined Chapter 11 process. This debt limit will return to its prior limit of $2,725,625 after one year (unless further extended). 

Is a Chapter 11 Reorganization Right for Your Small Business?

A Chapter 11 reorganization is not the solution for every struggling small business. However, because of the recent changes to the Bankruptcy Code made by the SBRA and the further (temporary) changes implemented by the CARES Act, a Chapter 11 reorganization is now a more accessible option for many small businesses who find themselves unable to pay their creditors or afford their bills. 

Contact Our Experienced Business Law Attorneys     

There are many complex issues that you must address in the reorganization  process to ensure that you are taking the proper steps to protect your business. There is no one-size-fits-all solution, so it’s vital to consult an experienced business planning attorney who can advise you on the benefits, potential pitfalls, and challenges involved in this process. 

The attorneys at Wilson Ratledge regularly advises their clients on processes like business reorganization. As a small business, Wilson Ratledge is committed to helping business owners thrive in a post-pandemic climate. For questions or assistance, call one of the experienced North Carolina business attorneys at 919-787-7711 or via the contact form below. Wilson Ratledge looks forward to serving you and helping your business find its way back to success in a turbulent market.

Business Loan Options In North Carolina

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Raising money for starting or growing a business is one of the most challenging parts of being an entrepreneur or a business owner. You might have that revolutionary idea for a product or a service, but your resources aren’t just enough. So, where do you turn to get the financing for your business idea?

Thankfully, there are many loan options for you and professionals to help you get the best terms.  Various options are available, including state grants, crowdfunding, regional loans, and state-based loans.

In this post, you’ll learn how to get the funds to start your business or keep it running. Here are ten ways to fund your start-up business or get resources to realize your business goals.

#1. Bank loans

Many small and medium businesses are eligible for a bank loan if they have a good credit rating. Banks will need to look at your business’ financial health and your income to determine your eligibility. In North Carolina, many banks have programs designed specifically for small businesses to get off the ground.

#2. SBA loans

If you don’t qualify for a regular bank loan, you may still be able to obtain a Small Business Administration (SBA) loan. The SBA Guarantee Program helps small and medium-sized businesses that may not be able to get funding elsewhere. Working capital loans can last up to 10 years and up to $ 5 million.

The SBA reduces the risk to lenders by guaranteeing repayment of loans. Businesses have a wide range of SBA loans to choose from. Each type has its own parameters and stipulations on using the money and when to repay it.

#3. Private equity

Private equity is a large industry that invests in businesses that are not publically listed. Private equity firms participate in your business and generate operating profit that you can use to build your business.

They usually stay in your company for around four years before leaving. Private equity entities typically make money by selling their position to another investor or back to you.

Some individual investors are focused on many types of businesses. For example, venture capitalists tend to focus on early tech companies, while some focus on late consumer companies.

#4. Strategic partnership

Suppose other companies or organizations are ready to contribute to your success. In that case, they are probably prepared to invest in helping you support yourself.  If you can create opportunities for them, they may be interested in supporting your growth by building strategic partnerships.

This mostly happens if your business is up and running and can offer opportunities to potential strategic partners. Strategic partners can be vendors, suppliers, and other people you have a common interest and benefit from the partnership.

#5. Crowdfunding

Crowdfunding is a novel way for small and medium businesses to fund their activities. These platforms use technology to connect the right entrepreneurs and investors. 

Crowdfunding can save time and effort by successfully creating a single business environment for all potential investors using profiles. The most popular funding platforms in the United States are Indiegogo and Kickstarter.

Remember that crowdfunding forums differ significantly in terms of performance, features, and requirements. Therefore, it is best to determine which one best suits your goals.

#6. Angel investors

Angel investors invest in promising business ventures that need quick funding for a piece of the business.

Angel investment is quite similar to private equity though it functions differently. It typically focuses on the earliest stage of technology start-ups. If you’re an innovative start-up with a bias to technology, this is one of the best options for funding your business.

One of the issues with this is that you will need to provide the angel investor with equity in your company and, most likely, some power in decision-making. Therefore, the angel investor approach must align with your vision and the company’s purpose.

#7. Grants

Government agencies and charities provide grants to businesses in various areas. A business grant is money given to companies in need when repayment is not expected. The money you’re given is not a loan, and therefore no interest is attached.

Generally, businesses that qualify for grants will have to offer some form of ‘public good.’ There are research and development grants programs, environmental companies, social services, child care, etc.

#8. Business credit card

If you’re short on cash, a business or personal credit card can be good to use to help your new venture get off the ground. Be careful with these, though, as interest rates can be high and terms can be onerous.

#9. Short-term loan

Not all companies (or business owners) have good credit scores, but funding options are still available. You can get the funding or capital you need with a short-term loan. Generally, the repayment period is only a few months, and interest rates can be higher than other options.

#10. Invoice financing

If you charge a customer, you may have to wait weeks or months for payment to be made. However, you can get your money earlier with one of the many programs which offer invoice financing, which borrows money based on the value of unpaid invoices.

Our Raleigh Business Lawyers Can Help With Your Startup

Starting a business is hard – the team at Wilson Ratledge can help your firm with legal and startup advice to put you in the best situation as you launch your new venture. Call them today at 919-787-7711 or fill out the online form to schedule a consultation today!

Navigating Changes in Tax Law After Relocating To North Carolina

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North Carolina is a great state to live in. Whether you are an individual who has just moved here or a business owner, some changes to the tax law that you may not be aware of could affect your finances. This blog post will introduce those changes and offer advice on how to adapt after moving to the Old North State.

1. Sales tax

In a move to make the sales tax system fairer, effective October 1st, 2020, North Carolina State Sales and use tax is currently at 4.75% plus an applicable local rate ranging between 6.75% to 7%. Additionally, items or goods at the general rate attract an additional local option sales tax rate capped at a flat rate of 2.25% for all counties in North Carolina.

Under the NC sales tax, goods subject to this levy include physical property, like furniture, home appliances, and motor vehicles. On the other hand, groceries, prescription medicine, gasoline fall, electricity storage, and consumption are sales and use tax exempted. 

Sales Tax on ‘Remote Sales’ in NC is also capped at 4.75%. However, the levy applies if the cumulative sales exceed $100,000. You are also required to charge sales tax if you did 200 or more separate transactions in North Carolina within the tax year understated or the previous year. 

2. Income tax for new NC residents

Under North Carolina law, a person who moves to the State for a “definite term or particular undertaking” and abandons the intent to return to their original state of residence is subject to North Carolina income tax. This provision covers all income earned or derived from any source in North Carolina after all applicable deductions and exemptions. This includes salary, wages, commissions, and self-employment such as business income. The new resident’s income is reported on Form D-400, Part B.

The exemptions under North Carolina law that may affect your tax bracket include retirement income received during the year but did not work in NC all year round, or if you worked fewer than 6 months in the state. You’ll only be taxed on the income earned in NC. Other exemptions include unemployment benefits and qualified military wages earned outside North Carolina.

According to the 2020 Personal Taxes Bulletin, a taxpayer can also take credit for personal income taxes paid to their previous state of residence. However, the amount of the credit cannot exceed the North Carolina tax liability. 

3. State income tax deduction for federal taxes paid

The state income tax deduction for federal taxes paid is limited to $10,750 per individual or $16,125 for the head of household and $21,500 for married taxpayers filing jointly. This restriction applies only to the extent that the taxpayer itemizes deductions on Schedule A (Form D-400). It should also be claimed in the taxable year 2017 and each taxable year after that.

4. NOL carryover deduction

As of June 30th, 2020, Governor Cooper assented into law Session Law 2020-58 House Bill 1080. The new Notice under the State and Federal provisions suspended the 80% NOL carryforward deduction limit until the end of the tax year 2021. This suspension also covers NOLs incurred during the tax years 2018, 2019, and 2020.

For this reason, filers can now carry over NOLs indefinitely without worrying about the 80% limit. This reduces tax liability by allowing the business owners (S-Corps & C Corps) to file for NOL deductions on their personal income tax returns.

5. Corporate income tax

The North Carolina Senate, on June 10th, 2021, passed House Bill 334 with their own amendments. The amended Bill that seeks to reduce the state’s 2.5% corporate income tax, provide a moratorium of three years between 2024-2026 before the rate is reduced by 0.5% and completely phased it out by 2028. This law is meant to attract foreign investments, resulting in job creation and growth for the state’s economy.

Contact Our North Carolina Tax Attorneys

The tax attorneys at Wilson Ratledge can help you navigate all your tax issues. We understand that it can be very complicated or stressful to deal with tax controversies or tax planning. This is why we do all we can to help our clients and ensure that they have nothing to worry about. Contact us today for more help in adjusting to the local tax laws as you continue settling in North Carolina.

The Mergers & Acquisitions Process In North Carolina

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People use the terms mergers and acquisitions interchangeably, but they have different meanings. In an acquisition, a company takes over another one and becomes the new owner. A merger refers to two firms, roughly the same size, that come together to do business as one company or a merger of equals.

For example, Daimler-Benz and Chrysler merged to become Daimler Chrysler. They surrendered their stocks and issued new company stock for the new company. Asset acquisition refers to the purchase of a company’s assets instead of its stock

A business acquisition describes when your company buys most or all shares in another company to get control of the company. When you purchase over 50% of a firm’s stock and assets, you can decide what to do with the assets without waiting for approval from the other shareholders.

Benefits of Mergers and Acquisitions (M&A)

A merger or acquisition can have several benefits for your company:

Better Economies of Scale

If you join forces with another company, the new and larger company has higher material and supply needs. When you purchase the necessary materials or supplies in larger volumes, your business improves scales with lower costs, and you can pass the lower costs to your customers.

Lower Costs of Labor

Mergers or acquisitions mean eliminating extra staff that might be doing the same job. It means lower wage costs and the maintenance of a more dynamic workforce. You can review the worker’s performance doing similar roles and choose the best one for each position.

Enhanced Market Share

When you merge your company with another in the same industry, the new company enjoys a better market share. The company taps into the resources both companies bring to the table.

Improved Financial Resources

When you get into an M&A deal, you pool your finances, increasing your new company’s financial capacity.  You may encounter new investment opportunities, and you can now reach a bigger audience because you have a more significant budget for marketing and more inventory.

Potential Pitfalls of Mergers and Acquisitions

Mergers and acquisitions also can have their pitfalls despite their many benefits. Carefully consider the pros and cons of M&A. Some of the pitfalls include:

Increased Expenses

You have to pay all the professionals involved in the M&A logistics. If you acquire another company, you have to pay a lump sum for its assets. This cost may be a disadvantage to your business.

Loss of Potential Opportunities

The energy, financial resources, and time that go into a merger or acquisition might mean your company and the other company have to forego opportunities that may arise during the process.

The M&A Process

Mergers and acquisitions are complex processes that require the help of professionals like lawyers, accountants, and risk management professionals to guide you towards a successful deal conclusion.

Contact An Experienced North Carolina M&A Attorney

This process is time-consuming and complex. You need experienced professionals who know how to navigate the process – Wilson Ratledge has the experience and expertise to guide you and your company through the challenging process of a merger or acquisition. Contact us today to schedule a consultation to talk more about your situation and how we may be able to help!

How Innocent Spouse Relief Can Help In Tax Controversy Situations

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Tax season can be one of the most stressful seasons for individuals and business owners. While some may perceive the IRS as always being out to get them, this perception is not based on facts. In some cases, the IRS creates systems aimed at helping the taxpayer recover from tax errors that could otherwise result in hefty fines.

One example of such a system is the innocent spouse relief. Innocent spouse relief is tax relief provided by the IRS to offer individuals relief from the responsibility of paying taxes, accrued interests, and penalties resulting from inaccurate reporting on their taxes by their ex-spouse or current spouse. 

If the IRS is coming after you for underreporting errors made by your spouse or ex-spouse, working with an experienced tax controversy attorney can improve your chances of getting innocent spouse relief. 

Understanding North Carolina’s Innocent Spouse Relief 

If you live in North Carolina with your spouse or if your spouse lives outside North Carolina but has taxable income in North Carolina, you are allowed under the law to file a joint single tax return. By filing a joint tax return with your spouse, you expressly agree to pay all taxes, accrued penalties, and interests due on your joint tax return.

Oftentimes, individuals who file their tax returns jointly with their spouses find themselves being held responsible for the mistakes of their ex-spouses by the IRS.  If you find yourself in such a situation, applying for innocent tax relief can absolve you of the consequences of the mistakes made by your spouse or ex-spouse.

Classification of Innocent Spouse Relief According to the IRS

Innocent spouse relief can be classified into three types:

  • Basic innocent spouse relief
  • Separation of liability relief
  • Equitable relief

1. Basic Innocent Spouse Relief

This type of relief is designed to relieve you of the responsibility of paying taxes, interest, and penalties resulting from the mistakes of your spouse or ex-spouse. This form of relief applies if you can establish that you didn’t know or have reason to know that the filed returns were erroneous.

2. Separation of Liability Relief

Under this form of relief, the taxes, penalties, and interests owed to the IRS are divided equitably between you and your ex-spouse. This type of relief applies if you are no longer married to your spouse and are not living in the same household for 12 or more months, from the date of separation to the date you file for innocent spouse relief.

3. Equitable Relief

If you don’t qualify for either of the two options listed above, you may still apply for innocent spouse relief by electing equitable relief. This option applies if the underreported or unreported item is attributed to your spouse, or the reported tax is correct but wasn’t paid in full with the returns.

Innocent Spouse Relief Application Process

On the IRS website, you will find a questionnaire that can help you determine eligibility for the relief. Alternatively, a tax lawyer can guide you through the process. 

After establishing that you qualify for innocent spouse relief, the next step is correctly filling out Form 8857 and submitting it to the IRS. After submitting the form, the IRS will take time to review your case and contact your spouse before making a determination. 

How the Innocent Spouse Relief Works

After the IRS approves your innocent tax relief, the interests, penalties, and taxes directly related to items on your tax returns that are underreported or unreported items will be collected from your spouse or ex-spouse. However, not all taxes qualify for innocent tax relief. Items such as shared responsibility payments, household employment taxes, business taxes, and penalties on trust fund recovery for employment taxes do not qualify. 

Our Raleigh Tax Controversy Team Can Help

If you are experiencing a tax issue where you may qualify for innocent spouse relief, Wilson Ratledge can help. Our team of experienced tax controversy attorneys can review your situation and help plan the best path forward to help resolve your tax issues. Contact us today to schedule a consultation!

So You Received Notice Of An IRS Audit. What’s Next?

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IRS audits are thorough and often result in penalties (and prosecutions in cases of criminal conduct). Consequently, many people are alarmed when they get a letter from the tax man notifying them of an audit of their taxes. 

There is nothing to be worried about if you don’t have anything to hide. However, it is still important to prepare properly for the audit to expedite the process and avoid harsh consequences. Here is a brief guide on what to do if the IRS is auditing you. 

Know What to Expect 

One of the first questions that will pop up in your mind when you receive the audit notification is, “what will happen now?” It’s easy to start to worry about worst case scenarios – instead, conduct quick research to familiarize yourself with IRS tax audits. 

Start by reading the audit letter from the IRS carefully. The letter will contain important information regarding the audit, including:  

  • Why you have been selected for the audit 
  • The steps to take to comply with the audit 
  • The deadline for complying with the request 

It is important to find out how the IRS intends to conduct the audit. The IRS can take one of three approaches: 

  • Correspondence audit (by mail)
  • An office or desk audit (at the local IRS offices)
  • A field audit (in person at your home or business) 

Finally, don’t hesitate to ask as many questions as you may have regarding the process and why you were selected for the audit. Ensure that you get your information from trustworthy sources to avoid potentially costly confusion. 

Prepare Your Responses & All Relevant Documents 

The IRS will include instructions in the notification letter on what to do to comply with the audit. These instructions mostly entail providing the IRS agents with receipts and other financial documents relevant to the audit process. 

Some of the common documents required in an IRS audit include: 

  • Bills 
  • Receipts 
  • Bank statements 
  • Copies of old tax returns 
  • Tickets 
  • Canceled checks 
  • Medical records 
  • Loan agreements 

Please ensure that these documents are authentic and up to date. Whether you’re being audited or not, it is a good idea to properly store and retain your financial records and documents in preparation for situations such as these. 

It is important to comply with these requests on time to expedite the process and avoid harsh penalties – don’t hesitate to request a postponement to collect and organize all of the requested documents. Additionally, it is advisable to avoid providing more documents than requested (some people do this to try to prove their innocence), as this may send the auditor looking for more errors.

Hire a Tax Attorney 

The IRS uses complex algorithms to identify potentially fraudulent practices that warrant an audit. Additionally, tax law and calculations are just as complex – often too complex for the ordinary person to follow. It is easy to make mistakes that warrant harsh penalties, such as expensive fines and prosecution (with the potential for serving time in jail in some of the worse cases). 

Many times, it is advisable to hire a tax attorney familiar with these types of proceedings before starting correspondence with the IRS. Tax attorneys are intimately familiar with tax law, and so your attorney will do their best to shield you from unfair treatment from the IRS. Other benefits of hiring a tax attorney include: 

  • Helping you find and prepare all documents requested by the IRS 
  • Reducing the risk and severity of tax liabilities, penalties, and other charges resulting from the audit 
  • Defending you against allegations of wrongdoing and filing an appeal when necessary 

It is especially important to hire a tax attorney if the audit will be held at the local IRS office or at your home or workplace, or if you often engage in large and complex financial transactions.

Wilson Ratledge has helped clients of all sizes with tax audits and other tax controversy situations with the IRS – call us today at 919-787-7711 today to schedule a consultation!