What Is Included In Business Succession Planning?
A business owner needs to consider various strategies in order to prepare for the expected and unexpected legal challenges. To do so, the business owner should generally form a separate entity, such as a corporation. Next, whether the business is owned by one person or multiple partners, every business owner must consider planning for an exit strategy. Moreover, the business owner must understand the effect of certain provisions in the contracts he has entered into or those that were entered into on his behalf, including by agents. Furthermore, the business owner must ensure that the scope of an agency relationship, if any, is specifically defined.
Why Does A Business Owner Need Advance Planning?
1. The Status of the Business
If a business owner does not form and operate under a valid legal entity, a number of issues may arise. For tax purposes, the business owner may end up paying significantly higher taxes if certain types of entities are not properly formed. For example, it’s sometimes more advantageous to pay taxes as a shareholder of a corporation rather than as an individual operating under a sole proprietorship.
There is also a concern for personal liability. A business owner, who is not protected by limited liability, such as sole proprietorships and general partnerships, may be personally liable for all the claims made against the business. For example, if the business entity is sued by a creditor, the businessman may be required to satisfy the debt from his personal funds. The consequences of which may include a fire sale or a lien on the personal residence, provided that the funds of the entity (or her share in the entity) have been exhausted. Therefore, an attorney should review the businessman’s circumstances to secure the filing of the appropriate entity and to ensure that formalities are properly followed.
2. Business Operations
It’s also important that any contracts entered into by the business owner are properly drafted and reviewed. Certain clauses in contracts can have a significant impact on the rights and remedies available to the businessman. For example, if the businessman’s contract contains a provision which includes a forum selection clause (meaning the clause designates the opposing party’s jurisdiction as the forum state for litigation matters), the businessman may be forced to litigate in another state.
The litigation of a claim in another state can be costly, time-consuming, and possibly lead to unfavorable results. The forum selection clause has the power to not only designate the opposing party’s state as the forum for any legal disputes, but also the law of the opposing party’s state may become the controlling authority on the matter. Therefore, proper contract review is essential at the time of the contemplation of the agreement, since certain provisions may have consequential effects on the rights and remedies available to the business owner.
It’s also common for business owners to enter into agency relationships with persons who are not their employees yet they carry out transactions on behalf of the business owner. If the agency relationship is not specifically defined, the businessman may be bound by the contracts that were entered into by the agent on behalf of the businessman. This is true even if the agent has limited authority, yet the third parties are not aware of the limitation. Therefore, the relationship between the businessman and the agent should generally be contractually defined.
3. The Inevitable End to the Business Owner’s Interest in the Business
An exit strategy should be considered by every business owner, including individual business owners who do not operate with partners. Many business owners are under the impression that they can simply sell the business should there be any significant changes in their lifestyle, such as a disability or retirement. However, the notion that the business will be bought out in the future for the market value of the business does not often turn out to be true. Therefore, it’s important to consider the steps that will be taken when retirement approaches and how the interest in the business will be transferred when the businessman is no longer alive or no longer capable (physically or mentally) of operating the business.
In case of partnerships, it’s important to plan ahead for an exit strategy by, among other things, forming a Buy-sell agreement. It’s inevitable that all partnerships will end either in dissolution or death. When such events are triggered, the spouse of one of the partners may become the successor of the decedent’s interest. The spouse may not necessarily have the same skill-set that the decedent possessed. As such, many issues may arise if these matters are not agreed to in advance of these events. Therefore, it is critical to also plan ahead when the entity is owned by multiple partners.
How Does Our Firm Assist In Business Planning?
At its core, we consider a 360-degree analysis of the business itself. Once we understand the structure of the business, then we advise the client to choose the entity that is the best option for the client. Whether we advise the client to form an LLC, LLP, or a corporation, the decision will depend on the client’s circumstances. We also draft the actual documents and provide the instructions necessary for the formation and operation of a valid business entity.
An equally important service we provide for our clients is in explaining the formalities required in order for the business to be a legally enforceable entity. Many are under the impression that by simply filing documents with the state on behalf of the entity is sufficient for the establishment of a legal entity. However, when formalities are not followed, courts will generally find that it is not a legally enforceable entity, which may cause the business owner to not be protected by limited liability.
A crucial component of business operations is proper contract drafting. Since business owners are engaged in some form of contractual obligations on a periodic basis, whether they are expressly created or created by implication, we advise our clients to take into account all of the terms and provisions that go into the agreements they have entered into or those agreements that have been entered into on their behalf.
Have a tax advantaged succession plan? Contact Haik Chilingaryan.
Author: Haik Chilingaryan is the founder and principal of Chilingaryan Law. He is an attorney, entrepreneur, published author, and commentator on TV.
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