Tuesday, August 30, 2022

Estate Planning for your Business

Mary has several businesses, a real estate partnership with one other person, another business organized as a Limited Liability Company of which she owns 51%, and a third business organized as a corporation which Mary owns 50% of the shares and her brother owns the other 50%.

Mary has three children, two are well into adulthood, but her youngest is 17 and will be starting college next year and plans to study medicine after she completes her undergraduate degree.  Her oldest child, Lindsey, has been working in Mary’s LLC for several years, and has expressed interest in becoming an owner at some point in the future.  The other adult child, Hunter, has no interest in working in any of the businesses.

As a single mother, Mary is concerned about what will happen to her businesses because they are her main source of income and her largest assets. She wants to know what to do if she becomes disabled, and how she should plan for her businesses after her death. 

Here is a list of things to do to start planning for your business during disability or after death:

  1. Set aside time to get your business affairs organized. Make sure you have a copy of your organizing document for each of the businesses.  The organizing document may be called the Articles of Organization or the Certificate of Formation.  It is the document that was filed with the Secretary of State in order to begin operating as an LLC or a corporation. 

  2. If you have an LLC or Corporation, check to make sure you are up to date with your annual fees. If you are in Georgia, you can check the Secretary of State’s website to see if you are in compliance. 

  3. Check to see if you have an Operating Agreement if your business is organized as an LLC, or a Shareholder’s Agreement if organized as a corporation.

An LLC operating agreement is a document that spells out the terms of a limited liability company according to the needs of the members. It also outlines the decision-making structure of the organization. An LLC operating agreement should spell out the following:

  • The ownership interest of each owner, which is normally stated as a percentage

  • Responsibilities and voting rights of members

  • Duties and powers of the members

  • Rules regarding when and where meetings should be held

  • How profits and losses will be allocated

  • Management of the LLC

  • Buyouts, transfers, and sales of shares of members

A shareholders' agreement is usually a document outlining the arrangement among shareholders regarding how a company should be operated, and the shareholders' rights and obligations.

One purpose of the shareholders' agreement is to protect the rights of shareholders and make sure that shareholders are treated fairly.

The agreement should also address how shareholders will make decisions about who may become future shareholders and safeguards the position of minority shareholders.

  1. Talk with your family and any business partners or investors to discuss the future of the business.  Can the business continue if you become disabled or die?  Or is this a business that requires a license you have or a set of skills that only you have?

If you don’t have operating documents, set up a meeting with any partners, co-owners, or members to discuss how the business should be run in the event of the disability or death of one of the owners.
For example, Mary and her brother own equal shares of the corporation, and have equal say in business matters.  What happens if Mary is no longer able to participate in the business?  Is she able to leave her shares in the business to her children?  Would the children have the ability to make decisions with her brother?  Is that a good idea?

  1. The owners of the companies should decide whether they will have a buy-sell agreement allowing the surviving owners to purchase the interest of the deceased or disabled owner, and how they will finance that agreement.  Should they purchase disability and/or life insurance so the survivor(s) can purchase the shares of a disabled or deceased owner? 

  2. Work on a succession plan.  Could you gift or sell ownership interests to a child that is working in the business?  If one child gets the business, is there another asset to leave to other children? If none of your children are interested, should you seek to hire an employee now or in the future that might eventually want to buy your share of the business?

  3. Make sure to get your will and/or trust in place.  You will want to make sure to choose a personal representative or trustee that can manage the business interests if you become disabled or die.  In addition, make sure that you have a durable financial power of attorney that allows someone to manage your business interests in case of disability.  (A power of attorney is no longer in effect after your death)

  4. Visit with your CPA or other tax professional to make sure all your tax planning is in place for the business.

Here is the August checklist:

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