May 14, 2008
Business planning for small closely held companies is performed primarily for the purposes of protection from catastrophic lawsuits and as a way to effectively manage family assets. Strategic Wealth Legal Advisors does not act as corporate counsel, but will be instrumental in creating such entities and assisting in maintaining them.
Incorporation is the process of making a corporation out of an existing or new business. This usually involves filing of Articles of Incorporation, creating a shareholders agreement, and running the organizational meeting to set up the corporation. Clients that are concerned about catastrophic lawsuits can benefit greatly by incorporation. Generally speaking, lawsuits that arise because of business activity will not jeopardize personal assets outside of the corporation. However, this is contingent upon effectively running and maintaining the corporation. Clients must be concerned with keeping business and personal assets and matters completely separate, maintaining corporate formalities, and properly capitalizing the corporation to anticipate lawsuits in the future. If this is done correctly, the client can enjoy a higher level of asset protection from the entity.
Limited liability companies allow a business to act like a corporation, but to be taxed a partnership. Formalities for the maintenance of a limited liability company are much more simple than for the “S” corporation (which also allows taxation similar to a partnership). Limited liability companies have members instead of shareholders and have managers instead of a board of directors. Otherwise, filing requirements for an LLC are similar to that of a corporation. The asset protection component of an LLC is also similar to that of a corporation. Unlike in previous years, a client can now create a single member, manager operated LLC for asset protection and as a strategy for reducing estate taxes after death.
A buy-sell agreement allows partners to a business the ability to pre-negotiate a contract for the sell of the business upon future stated events. Death is the most common event planned for under these circumstances. By creating an agreement that establishes price and terms for a sell, the parties have the piece of mind that their interests will be protected. For the survivor of a partner to the business, it means that they will be cashed out for a reasonable amount at a reasonable time. For the surviving partners, it means that they are assured of receiving the business at a reasonable price and terms. Buy-sell agreements can also plan for additional contingencies such as disability of a partner, divorce of a partner, and the planned retirement of a partner. Often, a financial vehicle such as life insurance is used in order to provide liquidity for the buy-out. These plans usually involve either the business purchasing the policy upon the lives of the partners or the partners merely buying a policy upon the lives of the other partners.