Business Planning

Class Info

Law School: Liberty University School of Law

Course ID: LAW 645

Term: Spring 2020

Instructor: Dean Todd

Books Used
  • Business Planning: Closely Held Enterprises by Dwight J. Drake
  • Business for the Glory of God: The Bible's Teaching on the Moral Goodness of Business by Wayne Grudem
  • The Millionaire Next Door: The Surprising Secrets of America’s Wealthy by Thomas Stanley & William Danko


EBITDA is earnings before interest, tax, depreciation, and amortization. It is an important factor in valuing a business because it shows sort of the upper limit of what earnings can be with the current market.

Discounted Cash Flow of Future Earnings

The main way of valuing businesses is by the discounted cash flow of future earnings method. This looks at the EBITDA and projects its increase several years into the future. This is then discounted to account for the uncertainty of that scenario.

Value = Earnings Desired Return Rate
Tax Examples
From Problem 3-A
C-Corp w/ 100k Div C-Corp w/ 100k Salary S-Corp w/ 40/60 Sal/Div Split Partnership Owning 90%
Corp. Income Tax 31.5 8.893 ((150 - 100 - (15.3 / 2)) * .21) 0 0
Ind. Income Tax 15 24 35.26 (.24 * (40 + 106.94) (150 - 40 - (40 * .0765))
*(§199A would take off 5.13)
Payroll Taxes 0 15.3 (100 * .153) 6.12 (40 * .153)
Total Taxes 46.5 43.195 36.252

Dividend is preferable, but the IRS will audit if you don't have enough salary.

Corporations may give more liability protection than single-member LLCs in some states.

Double tax can be avoided largely in closely-held C-corps by just paying out the money as salaries.

LLCs let owners change the rules. Corporations may be preferred because they have standard rules without needing to negotiate them. LLCs may be preferred to let minority shareholders negotiate rights.

Controlled Group

Corporations are a controlled group if all corporations are owned at least 80% by a parent corporation (26 U.S.C. § 1563(a)(1)) or if pairs of two corporations are owned more than 50% by the same 5 or fewer people, but only including stock the extent identical between the corporations. (If Jim owns 10% of X and 40% of Y, only count 10%.)

Problem 3-G
X Corp Y Corp Z Corp
Jim 10% 40% 30%
Linda 80% 50% 25%
Sam 10% 55% 45%
  • X & Y: 10% + 5% + 10% = 25%
  • X & Z: 10% + 25% + 10% = 45%
  • Y & Z: 30% + 5% + 45% = 80%
Example of Contributing Property with More Nonrecourse Debt than Basis

If the value is $500, basis $250, and debt $400:

  • First, $150 (400-250) of debt is allocated to the contributor.
  • Then, the remaining debt is distributed the same as gain. (If equally, $62.5 (cuz (400-250)/4))
  • Basis would be $62.5 (cuz 250-(400-150-62.5))
  • 26 U.S.C. § 752
  • So no gain recognized because he has basis left. The basis was greater than the debt relief.

There are two tests for insolvency:

  • The balance sheet test says a business will be insolvent if all its liabilities will become greater than all its assets.
  • The cash flow test says a business will be insolvent if it will not be able to pay its debts as they become due in the usual course of business.

MBCA § 6.40(c).

A company cannot distribute a dividend if it will make it insolvent.