Small businesses are the engines for innovation. They not only account for 75% of all businesses in the U.S., they also provide for over 50% of jobs. It is readily apparent that small businesses are vital to the U.S. economy and help shape our great nation. Yet, a majority of small businesses fail to pass to the next generation. Even worse, only 13% of small businesses survive to the third generation. Why is this? As Benjamin Franklin said, “failure to plan is planning to fail.”
Think of business succession planning as a plan to manage issues that create a smooth transition between you and the future owners of your business. With family businesses, succession planning can be especially complicated because of the relationships and emotions involved - and because most people are not that comfortable discussing topics such as aging, death, and their financial affairs. In most cases, the "killer" is taxes or family discord, both issues that a good family business succession plan will cover.
When considering your business succession plan, it is easiest if you break your planning into three main issues: management, ownership, and taxes. Let’s start with the easy one. Estate taxes. Currently, the Unified Credit (the coupon the federal government gives everyone to pass their assets upon death free from estate tax) is set at $3.5 million. In 2011, it drops to $1 million. Any excess is taxed at approximately 50%. If a person dies owning a successful small business, that business may have to be liquidated to pay the estate tax.
Let’s assume that either the estate tax is not an issue. What other issues may derail all the hard work someone put into growing a business? It could just be family dynamics. Sibling rivalry could hinder the succeeding generation for management. Or the older generation may not wish to let go of management because of the fear of losing their leadership role in the family. Or there may be different expectations and ideas on the direction the business should grow in the future. Consider the sacrifices the founding member made to make the business successful. 80 hour work weeks. Missing baseball games and dance recitals. The younger generation may not understand or appreciate the hard work.
So what can be done? First, ensure that the business is structured properly so that it may be passed easily to the next generation and ease the tax burden if needed. There are many, many ways to do this based upon the goals of the family.
Second, schedule family meetings where business planning such as short and long term strategies are discussed. It is important that the older generation explain the values in which the business was started and grown, while the younger generation decides whether they are willing to manage the business and if so, what direction they envision the business heading. These meetings are also an opportune time to facilitate identifying if, or which child can be groomed to be an heir. Erase the concept that the only fair thing to do is to divide the business equally between your children. While this is a nice idea in theory, it may not be in the best interests of your business. Remember that management and ownership are separate business succession planning issues. It may be fairer for the successor(s) you have chosen to run the business to have a larger share of business ownership than family members not active in the business. Or it may be best to transfer both management and ownership to your chosen successor and make other financial arrangements to benefit your other children. Consider inviting a third party advisor, the business’s CPA or attorney, to identify this protégé.
Finally, it may be that the next generation simply does not want the family business. While that can be disheartening, it is best to address this issue when both the business owner and business is healthy. If you want to pass your family business along to the next generation, putting off business succession planning is the worst thing you can do. By discussing the issues with the family and creating a plan unique to your business and your family you can ensure that you have the funds you need to retire and that the business you have built continues to thrive in the hands of the next generation.
Stephen J. Lacey, JD, LLM-Tax is a partner in the law firm of McClelland, Jones, Lyons, Lacey & Williams, LLC. Mr. Lacey concentrates his practice in the areas of Estate Planning, Asset Protection, Medicaid Planning, Probate and Real Estate. To contact Stephen call (321) 984-2700 or visit www.mjlandl.com.
Showing posts with label Internal Revenue Service. Show all posts
Showing posts with label Internal Revenue Service. Show all posts
Tuesday, October 20, 2009
Wednesday, May 27, 2009
Smart Business ~ Don't Lose Everything & The Kitchen Sink!
Everywhere we turn, dark clouds are all around us. The stock market is down. Real estate values are down. Layoffs are up. But, it could be even worse!
A 2008 survey of corporate law departments shows increased expectations for litigation. Unfortunately, people often look to hold others accountable for their difficulties. Which is why lawsuits tend to rise as the economy sinks. So, what can you do to protect yourself?
Consider placing your business or rental property in a limited liability entity. Let's say you own a corner market. If you own it directly, then someone who is injured on the premises could collect against all your assets, including assets not involved in the business. This could include things like your personal investments, savings you've set aside for your children's education and even future inheritances. Let's say your business has assets of $500,000, you have investment and savings accounts worth $500,000 and a future inheritance from your parents worth $500,000. The entire $1.5 million could be in jeopardy.
However, if your business were owned by a corporation or a Limited Liability Company (LLC), the injured person could only collect against the $500,000 of assets in your business, regardless of the amount of the damages awarded to the injured party. Your other personal assets would be safe.
We can't stop there though. Many clients believe that if their business is in a S Corporation, then their business is also protected from the business owner's personal liabilities. Unfortunately, this is not the case. If you are a business owner with a corporation, you own that corporation by holding shares. Your personal creditor can seize those shares and therefore your business just as a personal creditor could seize your Exxon or GE shares.
There are relatively few types of assets that are statutorily protected from claims of creditors. One such asset is a membership interest in a LLC. With a LLC, the business is owned by way of membership interest which is essentially the same thing as stock but with an extremely important difference. If a creditor seeks to enforce a personal judgment against the business owner's interest in a LLC, that creditor will only be entitled to a charging order remedy, NOT seizure of the business owner's membership interest in the LLC. A charging order remedy means the judgment creditor will only be able to attach any distributions that come out of the LLC. These distributions are made at the discretion of the business owner as managing member and the courts generally will not have the authority to order that distributions be made. Therefore, in order to more fully protect the business, and likely the business owner's livelihood, the business should be placed inside a LLC.
Many readers may be rightfully concerned that their business interests are held in a S corporation and are not fully afforded the asset protection benefits of a LLC. Thankfully, the Internal Revenue Service and Florida statutes allow a change in structure whereas the S corporation can be turned into a LLC with no tax consequences as long as certain conditions are met. After converting to a LLC, the business can still elect the tax advantages available to S corporations if recommended.
Additionally, consider liability insurance. If someone sues you, that is your first line of defense. There is separate liability coverage for your home and your auto. In addition, you may need a separate policy for a rental property or any business-related liability, like malpractice insurance for a doctor. In addition to these separate liability policies, consider an "umbrella" policy which provides coverage on top of the underlying coverage. If you had a premises liability policy for your corner market, that policy would protect you up to the policy limit, let's say $300,000. This would pay first. Then your umbrella coverage would add its limit, let's say $1 million, on top of that. So, you would be protected for the first $1.3 million of court award against you. However, that would still leave some exposure to liability above the $1.3 million, if you did not have a limited liability entity.
Therefore, protect yourself, your business and your family!
Stephen J. Lacey, ESQ.
The Law Office of McClelland, Jones, Lyons, Lacey & Williams, is not offering legal advice. With respect to the material contained, some of the material may be affected by current and future changes in law. For those reasons, the accuracy and completeness of such information, and the opinions of its author, are not guaranteed.
A 2008 survey of corporate law departments shows increased expectations for litigation. Unfortunately, people often look to hold others accountable for their difficulties. Which is why lawsuits tend to rise as the economy sinks. So, what can you do to protect yourself?
Consider placing your business or rental property in a limited liability entity. Let's say you own a corner market. If you own it directly, then someone who is injured on the premises could collect against all your assets, including assets not involved in the business. This could include things like your personal investments, savings you've set aside for your children's education and even future inheritances. Let's say your business has assets of $500,000, you have investment and savings accounts worth $500,000 and a future inheritance from your parents worth $500,000. The entire $1.5 million could be in jeopardy.
However, if your business were owned by a corporation or a Limited Liability Company (LLC), the injured person could only collect against the $500,000 of assets in your business, regardless of the amount of the damages awarded to the injured party. Your other personal assets would be safe.
We can't stop there though. Many clients believe that if their business is in a S Corporation, then their business is also protected from the business owner's personal liabilities. Unfortunately, this is not the case. If you are a business owner with a corporation, you own that corporation by holding shares. Your personal creditor can seize those shares and therefore your business just as a personal creditor could seize your Exxon or GE shares.
There are relatively few types of assets that are statutorily protected from claims of creditors. One such asset is a membership interest in a LLC. With a LLC, the business is owned by way of membership interest which is essentially the same thing as stock but with an extremely important difference. If a creditor seeks to enforce a personal judgment against the business owner's interest in a LLC, that creditor will only be entitled to a charging order remedy, NOT seizure of the business owner's membership interest in the LLC. A charging order remedy means the judgment creditor will only be able to attach any distributions that come out of the LLC. These distributions are made at the discretion of the business owner as managing member and the courts generally will not have the authority to order that distributions be made. Therefore, in order to more fully protect the business, and likely the business owner's livelihood, the business should be placed inside a LLC.
Many readers may be rightfully concerned that their business interests are held in a S corporation and are not fully afforded the asset protection benefits of a LLC. Thankfully, the Internal Revenue Service and Florida statutes allow a change in structure whereas the S corporation can be turned into a LLC with no tax consequences as long as certain conditions are met. After converting to a LLC, the business can still elect the tax advantages available to S corporations if recommended.
Additionally, consider liability insurance. If someone sues you, that is your first line of defense. There is separate liability coverage for your home and your auto. In addition, you may need a separate policy for a rental property or any business-related liability, like malpractice insurance for a doctor. In addition to these separate liability policies, consider an "umbrella" policy which provides coverage on top of the underlying coverage. If you had a premises liability policy for your corner market, that policy would protect you up to the policy limit, let's say $300,000. This would pay first. Then your umbrella coverage would add its limit, let's say $1 million, on top of that. So, you would be protected for the first $1.3 million of court award against you. However, that would still leave some exposure to liability above the $1.3 million, if you did not have a limited liability entity.
Therefore, protect yourself, your business and your family!
Stephen J. Lacey, ESQ.
The Law Office of McClelland, Jones, Lyons, Lacey & Williams, is not offering legal advice. With respect to the material contained, some of the material may be affected by current and future changes in law. For those reasons, the accuracy and completeness of such information, and the opinions of its author, are not guaranteed.
Subscribe to:
Posts (Atom)
