Business legality and tax question

Discussion in 'Business, Careers & Education' started by MetroStyles, Aug 28, 2011.

  1. MetroStyles

    MetroStyles Senior member

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    Hello all. I am thinking of starting a business. This business will have zero profit and be 110% legal. In fact, the idea will seem stupid to you if you have half an inkling of common sense. But my question is not on whether it is a sound business plan. My question has to do with legalities and tax implications. 

    Illustrative example of business:

    1) Business purchases Widget X from itself at the retail price of $10. Total business expense = $10. 

    2) Business receives revenue from above mentioned transaction.  Total revenue = $10. 

    3) Net income = revenue - expenses = $10 - $10 = $0. 

    Question for the intelligentsia:

    1) Is the above example "legal" in and of itself? Is it legal to have the customer and the seller be the same entity when operating as a business? Is it legal for some business vehicles but not for others (e.g. Sole propietorships, LLCs, s-corps, c-corps, etc.)?

    2) From a tax perspective, would the above in and of itself result in zero taxable income?

    Thanks. 

    PS I understand that the devil is always in the details, but assuming everything else was 100% legal and that no other information is provided, what are the answers to the questions listed? I also understand that a lawyer and tax professional are required before undertaking any business venture and this fact is not lost on me. Just testing the waters here.
     
  2. Blackhood

    Blackhood Senior member

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    I'm in no way qualified to answer this but I suspect it is not.

    Reasoning: A business can't sell to its self, that is simply a transfer of assets. Two separate companies with the same owner could do it, but you would incur costs such as taxes and costs (accountants filing year-end documents for example) so you would result in a net loss.

    From a tax point of view, you have two companies operating at a loss, which means they don't pay tax (in the UK at least) but YMMV.
     
  3. MetroStyles

    MetroStyles Senior member

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    Thanks Blackhood. In essence I am trying to create a vehicle (or vehicles) in which I can purchase assets from myself. There is no catch and nothing shady. Would some sort of investment vehicle be a smarter approach? The net returns would end up being zero. 

    I know this is bordering on way to technical legally for a message board, but what the hell, it's worth a shot. 
     
  4. dune

    dune Senior member

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    Why would you want to do that? :s
     
  5. HgaleK

    HgaleK Senior member

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    You trying to profit from credit card benefits?

    Edit: As Blackhood said, you definitely can't do it if you and the business entity are one and the same. That said, you're dealing with a separate entity when it's a corporation. If you are looking to score off of credit card benefits, there may be a caveat in the contract that prevents this from happening.
     
    Last edited: Aug 28, 2011
  6. Booter

    Booter Senior member

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    Nice spam bump.

    Regarding the OP - I believe Mr. Fastow of Enron had this exact same idea of creating fictitious revenue...
     
  7. taxgenius

    taxgenius Senior member

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    Google "transfer pricing." I'm too lazy to elaborate.
     
  8. Grenadier

    Grenadier Senior member

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    Hire Skadden, they'll figure it out.
     
  9. taxgenius

    taxgenius Senior member

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    If they can't, they will get Fred Goldberg on the case to fight.
     

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