The Family Business: Avoid These 4 Lethal Legal Mistakes

If you operate a family-owned business or are considering starting one up, there are four potentially lethal legal mistakes you should take care to avoid, including:

No employment agreements.  Family members who work together are usually hesitant to confront one another if someone is not pulling their weight.  Having an employment agreement for everyone ensures that expectations for job performance are spelled out and what the grounds are for termination.

Mixing family and business finances.  Many family businesses start with loans from various members, and as the business grows, those initial investments need to be protected.  This is the stage when you want to consider setting up your family enterprise as a limited liability company (LLC) or a corporation.  Most small businesses use an LLC structure, which provides liability protection for personal assets and allows for company profits to flow through to owners.

No licenses.  Even if you operate out of your home, you will likely need to obtain a local, state or federal license to operate your family business.  While licenses are generally inexpensive, the fines for not having them can be costly.  You can find out what the requirements are in your area by contacting your city hall or county office.

No succession plan.  Family business feuds can easily occur when there is no succession plan in place.  Also, legally speaking, if a business has not been incorporated or formed as an LLC, the business dies when its owner does.  If you started a family business to keep it in the family, you need to follow through with a formal succession plan.

Having a business attorney who understands the individual needs and unique circumstances of your company is key to helping your business thrive and prosper. If you are interested in learning more about legal protection strategies for your business and how we work with you as a partner in protecting your company, call us today to schedule your comprehensive LIFT™ (legal, insurance, financial and tax) Foundation Audit.

Insurance Considerations for Small Businesses

Opening a small business brings excitement as well as uncertainty. As a small business owner you face many risks, but there are steps you can take to protect yourself against them. Obtaining insurance coverage is one big way you can protect your small business and help minimize many of the risks you face.

The kinds of insurance you will need to protect your business will vary based on what type of business you run, how it is structured, and where its potential liabilities fall, so make sure you speak with a lawyer about what specific protections your business needs.

At a bare minimum, if you provide services, you should have professional liability insurance to cover you against negligence claims from errors or omissions. If your business produces a product, you will also need products liability coverage. This coverage will protect you if you are sued because a defective product harmed someone.

If you have employees, even just one, you also need to have workers’ comp insurance. This covers medical care, disability and death benefits for an employee who was injured or killed as a result of the work. And, you may want to consider employment practices coverage, which will pay for you to have a lawyer represent you if you are ever sued by an employee, which is one of the biggest lawsuit risks you have as a business owner.

Most businesses also need some form of property insurance. If you have a home-based business, some losses may be covered by your homeowners’ insurance, but be sure to check your policy thoroughly. And you will definitely need separate insurance to cover business assets such as inventory and equipment.

You will need vehicle insurance if you have a vehicle for your business. Your personal auto insurance policy may cover you for some limited business use, but you won’t be covered if the vehicle is used primarily for business purposes. Make sure you optimize your policy to suit your businesses’ needs.

Business interruption insurance covers your day-to-day losses in the event you experience a closure or some other barrier to normal operations. This can help keep you afloat while cash flow is reduced.

And, of course you will want to consider personal insurance, such as disability coverage for yourself, in case you cannot work, and life insurance, as well, to cover your family and business in the event of your death.

As you can see, there are several types of insurance coverage for small businesses. Businesses in certain industries, such as manufacturing or logistics, may need additional insurance policies to cover industry-specific losses.

Knowing what types of insurance you need and the amounts that are right for your business and family is crucial, and it is not uncommon for business owners to need help with this step.

A good place to start is speaking with a trusted legal advisor who can help you determine what kinds of legal risks you face and what kind of insurance you need. Sit down with us as your Family & Business Lawyer to discuss how to best protect your business. Choosing the right insurance package can make all the difference in your business’s stability and security.

This article is a service of Gratia P. Schoemakers, Family & Business Lawyer. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule.

Your Family Business Legacy Matters Enough to Do These Three Things

Your family-owned and run business can be the greatest gift or the greatest burden to the people you love, if and when something happens to you.

If you’ve planned well and properly for your business to be continued, managed or sold, it will be the gift that keeps on giving and shows your family just how much you cared about them.

If you have not planned well and properly, it will be the gift that keeps on taking and creates an energy, time, and resource drain that costs your loved ones years of headache and leaves them with a nightmare of a mess to clean up.

Fortunately, you are reading this article now and there is still time to take these three actions that will make it far more likely your family business legacy creates the outcome you desire.

Organization and Formalities

One of the key elements in creating a family business legacy you can be proud of is organization and following formalities you think may not apply to you.

The truth is that with a family business, it’s even MORE important to follow the formalities. Your family deserves it.

This means having an updated operating agreement governing the operations of the family business, clear terms with any partners, in writing, taxes up to date, and clarity regarding who takes over and how when something happens to you.

Some things to consider: Who will be in charge of daily operations? Who will make personnel decisions? What about inventory? What is the chain of command? How will clients and customers be handled? If you have partners, will they buy out your family after you are gone? How? In what time frame?

Considering the answers to these questions now will save your family a huge amount of stress and leave them with the biggest gift you can possibly give them.  If you do not want to deal with it now, imagine how they will feel dealing with it after you are gone and be willing to do what’s hard. We can help and make it far easier.

Communication

How do you know what to communicate about and who to communicate it with?

In most cases, not knowing has left you mute. So here’s your list, and if you don’t know what to say, call us to help.

First, communicate with your team members to let them know you have a plan for what to do if and when something happens to you and let them know the plan!  Then, communicate with each of the people you’ve named in your plan so they know what to do if and when something happens to you.

If you do not yet have a plan to communicate, call us, we can help.

 Integrate the Younger Generation

In most cases, the key to a successful family business legacy is to involve the younger generation sooner than you think it’s necessary and beyond your comfort zone.

When you can involve the younger generation by inviting them into a conversation and connection about the business early on, in a way that has them feel appreciated, you’re on the path to creating something far more than what you have now.

Integrating the younger generation can be a challenge, if you do not know how to meet them where they are, so contact us for support when you are ready to do it.

It’s worth it to ensure that the hard work you have put in over the years to build your business will be there to support the people you love, rather than leaving them with more work to clean up the parts you weren’t willing to face.

This article is a service of Gratia P. Schoemakers, Creative Business Lawyer®. One of our primary services is a LIFT Start-Up Session,™ in which we guide you through the right choice of business entity, location of business entity, start up agreements, intellectual property protection, employment structuring, insurance, financial and tax systems you need to start your next business and succeed right out of the gate.   Call us today to schedule a time to have a conversation!

 

 

 

 

Family Business Options When Dealing with Divorce

If you co-own a family business with your spouse and you are facing divorce, a likely concern is how your business will be handled through the separation proceedings.

The good news is, it’s really all up to you. And, so much of it depends on the legal counsel you have representing you.

Much of how this situation is handled depends on your desires and your ability to work together, so make sure you find a lawyer who is committed to supporting both of you to get what you want, rather than who is focused on a win/lose paradigm that will simply end up costing everyone more and only making your legal team rich.

Your divorce can either be seen as a huge opportunity to uplevel your business or it can be a time to walk away and let go, knowing that you can start over and create something new on the other side.

That said, there are three main options available to you: continue to own the business together, allow one owner to buy out the other, or sell the business.

If your dissolution or legal separation is amicable, you communicate well, and you fundamentally trust each other, you may decide to continue co-ownership of the family business together. Some couples split duties, allowing one of the partners to manage the business while the other acts in an administrative role or even steps out of the operations altogether, and receives dividend payments based on company profits. Significant benefits to continuing co-ownership are that neither partner is divested of his or her interest and, in most cases, complicated business valuations are avoided.

The remaining two options—a buyout and a sale—would both necessitate a valuation of the business.

Business valuation establishes the fair market value of the business for the purpose of defining the marital estate. You need to know the value either to divide the business or to establish a selling price.

If you decide to go this route, contact us so we can make a referral to a business valuation expert we trust.  It is important to use a professional who is familiar with businesses in the same general industry as yours and, if possible, agree on a single shared evaluator as dueling experts– situations in which each party hires his or her own expert–are not uncommon in this area and can get expensive.

After the valuation, one spouse may buy out the other, or you may decide to have a business broker sell the business to an entirely new third party and split the proceeds of the sale.

Here’s the key: make sure you are working with legal counsel who is focused on a win/win/win outcome that doesn’t just consider how you can get as much as possible, but who focuses on the best possible outcome for all involved, including you, your spouse and the company as a whole.

Taking an approach that is focused on how much you can get will ultimately mean less for everyone because you’ll spend far more on valuations and legal fees when you could be using that capital to create more overall wealth for you, your spouse and the company and be splitting an overall bigger pie than what will be left after you try to take a bigger piece.

If you are married, and working together, and considering divorce, contact us before you contact litigation counsel. If we cannot help, we will refer you to divorce counsel we trust to support the most efficient, life and business enhancing resolution and you’ll save a tremendous amount of time, energy, and money in the process.

This article is a service of Gratia P. Schoemakers, Creative Business Lawyer®. We offer a complete spectrum of legal services for businesses and can help you lay out how you want to handle a family business in the unfortunate event of a divorce or legal separation. We also offer a LIFT Start-Up Session,™ which includes employment structuring, financial, and tax systems you need for your business. Call us today to schedule a time to have a conversation!

 

4 Fatal Legal Mistakes Family Businesses Can Avoid With Planning

Anyone involved in a family business knows that working with family has its pleasures and its pitfalls –incurring these legal pitfalls can prove deadly to your family business, so here’s how to fix them:

  1. Mixing family & business finances. Unfortunately, we live in a litigious society, so as soon as your family business is up and running, it’s important to shelter your personal assets by forming a legal entity like a corporation or limited liability company, which will protect the personal assets of investors/owners (i.e., family members) from business liabilities.  Without that protection, everyone’s assets are vulnerable if something goes wrong with the business.
  1. No business license. Many businesses, even those that are home-based, require a local, state or federal license to operate.  Without, you can face stiff fines or even be shut down.  Your city hall or county government office can tell you what is necessary to operate your business legally in your area. Or, you can contact us for a LIFT Start Up Session.
  1. No agreements. Unless you want employment in your family business to be a birthright, you need to have employment (or Independent Contractor) agreements that spell out – in writing – what the expectations are for the job each family member is doing and how they will be compensated, as well as termination guidelines.  Because there will probably come a time when you will have to transition a relative out.  Having a written agreement on hand to refer back to can help keep things civil.
  1. No succession plan. You must start your business with the end in mind so you can ensure your business takes care of your family throughout all of your life’s stages, including retirement and beyond your life as well. And what happens if the person who started it all suddenly wants to cash out, falls ill or dies?  If you want your business to go on without you, a succession plan that spells out how this will be accomplished is crucial.

We can help you prepare for the sale of your small business and guide you through the steps to a successful sale. Whether you are new to entrepreneurship or already operating a business, call us today to schedule your comprehensive LIFT™ (legal, insurance, financial and tax) Foundation Audit.

 

What Will Happen to Your Family Business When You Die?

Maybe you have dreamed of leaving the business you have built to your heirs, but if you do not have a buy-sell agreement, a business succession plan, a business transition plan or a business preservation plan in place, that dream may not be realized.

Any number of factors can work against your dreams if you have not planned ahead. The IRS could value your closely held business for more than it can be sold for, and your family will not be able to pay the taxes. If it is a partnership, the other partners may not be able to pay someone to replace you, or have the cash flow to buy your share of ownership from your heirs. That’s why it pays to plan for the unexpected.

Buy-Sell Agreements Provide Options

A properly drafted buy-sell agreement provides for numerous trigger points to ensure that when something happens — you or your partner dies, becomes disabled, gets divorced, or simply wants out – the remaining partner is able to purchase your shares of the business or that your shares can pass outright to your heirs.

A buy-sell agreement is a binding agreement that is put into place before you retire or die.  Depending on the needs of your business, the buy-sell agreement can be prepared to involve many forms of payment to the selling shareholder or estate.

For example, you can choose payment via one lump sum or payments made over time.  In addition, a life insurance policy can be procured to ensure the payments do not adversely impact company liquidity.

Family Business Succession Planning Issues

Family businesses can be complicated, especially if there are multiple generations or blended families involved.  Some key business succession planning issues for the family business include:

  • Transitioning to the next generation
  • Aligning the interests of all family members
  • Balancing the financial returns
  • Anticipating family disputes
  • Estate planning and inheritance issues

Studies show that only one-third of family businesses make a successful transition to the second generation.  Working with an experienced business planning attorney will help ensure that your business can thrive even after you are gone.

To learn more about maintaining business viability through skillful business planning, call us today to schedule your comprehensive LIFT™ (legal, insurance, financial and tax) Foundation Audit.

Succession Planning for the Family Business

We know that building a thriving family business takes a lot of hard work, and to ensure the business continues to thrive, it takes foresight and planning. When business owners are preparing to transition the business to the next generation of leadership, it is critical to have a well-considered succession plan to guide them.

To ensure a successful transition, there are three critical areas to focus on:

Compensation. A common pitfall for family business owners is not having a well structured compensation plan in place for the next generation of owners. This generally happens when parents own a successful business and have gained considerable wealth from that business. Along with their desire to pass the business on to their children, they also have a desire to pass assets as an inheritance. When the children come on board, it can be tempting for the parent-owners to combine their children’s work compensation with the anticipated inheritance. This can be dangerous, since the child will be earning more than is appropriate for the position and may suppress his or her desire to work hard to earn success. To avoid this, parent-owners should pass non-business assets to the next generation using other vehicles like trusts to ensure the inheritance is not tied to work compensation.

Financial planning. Joining the family business is not an instant guarantee of lifelong financial success, which is why it is important for the next generation of business owners to start planning for their own financial future – home ownership, parenthood, retirement, etc. Once the next generation joins the business, it is important for them to have a true picture of the company’s financials so they can accurately gauge their future earnings potential and plan for it.

Communication. Succession planning is both an art and a science, and there is no “one size fits all” for every situation. Frank, honest communication between the generations is critical to achieve buy-in on all fronts. Succession planning is also not a “set it and forget it” process; the best succession plans are flexible enough to be able to adapt to different variables that affect not only the business but the business owners as well.

We can help you.

If you’re a small or mid-size business owner, call us today to schedule your comprehensive LIFT™ (legal, insurance, financial and tax) Foundation Audit. We can help you plan for the successful transition of your business when the time is right.

How to Raise the Next Generation of Business Owners

If you own a small business, there is probably at least some part of you hoping to pass the reins on to one or more of your children.  After all, spending so much time and effort on something that’s not going to last doesn’t sit well with most entrepreneurs.

It may be difficult to look at your children when they are small and envision them running your company some day, but it can happen if you plan for it.  Here are some tips:

Start them out young.  Exposing your children to the family business should start when they’re young.  Talk to them about what you do and why you love it.  Attitude counts for a lot – if you come through the door complaining every day, they probably won’t want to go down that path.

Start them out somewhere else.  Every child needs to know they can succeed on his or her own, and are not just working in a company because a parent owns it.  Your company can also benefit from valuable experience gained elsewhere.  Once your child graduates from college, they should go work somewhere else for a few years.

Start them out slowly.  Once your child is ready to join your company, they need to start where you did – at the beginning.  Their expectations may be higher, but they won’t learn the company inside-out without first paying some dues.  Have them report to someone other than you, then see how they fare.  Move them along slowly and be sure to let them become acquainted with your customer base so your customers will be comfortable when it comes time for a transition.  To cut down on resentment among other employees, be sure to make it clear as early as possible that a family member will be taking over the reins some day.

Start them out differently.  If you have more than one child who is interested in working for your family business, they probably have different skill sets.  One may be better as a CFO and one may have CEO talents.  One may be better just sitting on the board.  Parents have a tendency to want to equalize, but every child is different – let their skills and interests guide you.

Start with a plan.  A business planning attorney can help you formulate a succession plan that will ensure continuity for the business when it’s time for you to step aside.  Your business succession plan needs to align with the goals of your estate plan to protect your assets.

Our successful work with owners of family businesses is based on a simple concept: we treat our clients like family.  Most of our clients are in business out of love for their families, and we believe it’s critical to not only take care of your immediate business needs, but also to help you look to the future to ensure your life and business leave a legacy of care and love.

To learn more about our personal approach to business succession planning, call us today to schedule your comprehensive LIFT™ (legal, insurance, financial and tax) Foundation Audit.

 

Don’t Bet the Family Business on No Estate Plan

Being the owner of a family business can complicate your personal estate planning, since no doubt much of the wealth you want to pass on to your heirs is tied up in the business.  Being able to do so in a tax-advantaged way – and in a way that won’t cause a family feud – is one of the best reasons you should be talking with a Creative Business Lawyer about a business succession or exit plan as part of your own estate plan.

Even if you don’t have to pass on as much as the Waltons (Walmart), the Fords or the Murdochs, you do need to plan for what you have.  Here are some things you should be considering:

How to handle not only the death of a family business owner, but also his or her possible disability, incapacity, bankruptcy or retirement.  A buy-sell agreement is the usual way to prepare for these possibilities.

If you transfer family business assets to the next generation before you die, you will be able to lower estate and gift taxes.

Do your heirs want to continue to run the business without you?  If so, a business succession plan needs to be put into place.  If not, then an exit strategy for selling the business and divvying up the proceeds would be a necessary task.

If you’re a small or mid-size business owner, call us today to schedule your comprehensive LIFT™ (legal, insurance, financial and tax) Foundation Audit.

 

Mistakes to Avoid When Selling Your Business

Baby boomers are the most entrepreneurial generation, with much of their personal wealth tied up in the businesses they own.  This makes it more important than ever for boomers to undertake some business estate planning for when it is time to transition into retirement.  Experts caution business owners to avoid these common mistakes when preparing to sell their business:

Owner dependency.  Buyers for your business can become nervous if much of the business’ success is tied to its owner.  If you delegate responsibility evenly among company managers, it will be easier to transition the business to new ownership when the time comes to retire.

Not planning ahead.  Business owners who plan to sell the business within the next 5-10 years may want to consider selling sooner at a lower valuation, which will help avoid a bigger gift tax bite.

Unrealistic valuation.  Placing a valuation on the business that is too high may torpedo your retirement plans.  If the eventual sale does not get you what you need for a comfortable retirement, you will need to adjust your plans or find a way to increase your retirement income.

Focusing only on the money.  While it is natural for business owners to want to get as much money as possible when selling their business, focusing only on the money can be a mistake.  Consider all factors of an offer, including how the buyer plans to finance the purchase.

Hiring a family member to do the deal.  Family members often come with their own baggage, so don’t tie your deal up by hiring a relative.  Instead, conduct a thorough search by interviewing several law firms and asking about their negotiation strategy, time to close and how they would recommend structuring the deal for family members who plan to stay involved.

Not planning your exit strategy.  A Creative Business Lawyer® can not only help with creating a succession plan for your business but can also assist with your personal retirement planning, helping to ensure a smooth transition.

If you’re a small or mid-size business owner, call us today to schedule your comprehensive LIFT™ (legal, insurance, financial and tax) Foundation Audit.  Normally, this session is $1,250, but if you mention this article and we still have room on our calendar this month, we will waive that fee.