18 Questions to Consider If You Own a Family Business

If you become disabled or die unexpectedly, who will run your business?

If you don’t know, you need a business succession plan.

If your family cannot run your business, will they be able to afford to hire someone to replace you?

If not, you should consider disability insurance and “key-person” life insurance.

If you become disabled or die unexpectedly, will your business partners pay your family a fair price for your share of the business?

Even if you think they will, a good Buy-Sell Agreement will help protect your family.

How do you know if your Buy-Sell agreement is well prepared?

A Buy–Sell Agreement should include provisions for:

Death                            Disability
Disagreement              Bankruptcy
Loss of license             Failure to perform duties
Retirement                   Business valuation methods

Does your Buy-Sell agreement require or allow remaining owners to buy out the departing owner’s interest when a “triggering” event occurs?

The two types of Buy-Sell agreements are voluntary and mandatory.  With a voluntary agreement, your business partners can negotiate the purchase of your interest.  It is merely an agreement to agree and does not protect you or your family. A mandatory agreement requires that the remaining owners purchase your interest and sets the valuation method.

Is your Buy-Sell agreement adequately funded?

To be of any value, your Buy-Sell Agreement must be funded.  The most common funding methods are:

  • Installment sale based on the current earnings of the business
  • Capital from the business is invested for future purchase (sinking fund)
  • Loan at the date of purchase Life insurance

Life insurance is the safest.  The others depend on the financial stability of the business.

How is the price of the departing owner’s interest determined?

Equally as important is the method of determining the price of the departing owner’s interest.  The most frequent methods are:

Appraisal                     Replacement cost of assets
Book value                  Multiple of earnings
Share value                 Annually agreed upon value

Replacement cost of assets, book value, multiple of earnings and share value can be manipulated and you will most likely not be available to detect the manipulation and protect your family.  Appraisal is better.  Agreed upon value is probably the best.

Does your succession plan accommodate siblings with different skill levels and interest in the business?

For a succession plan to succeed, it must take into account differing skill levels and interest in the business.  Even if one sibling is clearly most qualified to manage the business, the plan should not ignore the interests the others have given the business.

Have you minimized the tax impact of your plan on your business?

Proper succession planning must include estate, gift, capital gains and qualified family business exclusion tax planning.  Failing to include tax planning can sink your business.

Would you give away ownership of your business to your children if you could still keep total control?

You can begin transferring your business interests to your children when they are minors and still maintain absolute control.  Estate planning attorneys can design strategies that enable you to give it all away, keep total control and at the same time minimize everyone’s tax liability.

How can you give it away and maintain control?

Your estate planning attorney can design a personalized plan for you, your family and your business using various entities of choice that allows you to do just that.

What are the entities of choice?

Trusts, family limited partnerships and limited liability companies are the entities of choice because of superior asset protection characteristics and income tax flexibility.

Is your estate plan integrated with your business plan?

Your estate plan and business succession plan must be carefully designed and integrated for your plan to work.  It must work while you are alive and well, upon disability, upon death, to the next generation and beyond.

How might a family limited partnership or a limited liability company offer better asset protection than a corporation?

Assume you own stock in corporation.  If you are sued, the judgement creditor can take that stock just like any other asset.  If you own a limited partnership interest in a family limited partnership or membership interest in a limited liability company, all the creditor can get is distributions to which you are entitled.  The creditor cannot take partnership assets, cannot vote, cannot look at the partnership’s records, cannot change any aspect of your ownership and cannot be involved in management.  A very hollow victory indeed when compared to the loss of your stock.

How might a family limited partnership or a limited liability company offer better asset protection than a corporation?

How can a plan using a limited family partnership and limited liability company enable you to give it all away but maintain total control?

How is a trust–based plan superior, especially for business succession?

In a properly designed and integrated trust–based plan all of your assets are owned and controlled by your trust.  If you become incapacitated or die, your successor trustees step up to the plate in a seamless transition without the interference and costs of the courts.

Are you willing to pay the costs of protecting your business for your family?

Failing to plan is penny-wise but pound-foolish.  You may save the up–front planning costs but the back end costs could cost your family everything.  Back–end costs include:

Estate taxes                                 Capital gains tax
Litigation between siblings       Litigation between business partners
Probate                                        Conservatorship
Receivership                                Bankruptcy
Fraudulent transfer                    Personal liability

Failing to update your plan could be as costly as failing to plan!

​For more information contact: Alexis Gonzalez, Esq. | Gonzalez Law, P.L. | 305.858.4512 | info@gonzalezlaw.biz

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