Good business planning starts at formation, and continues through the eventual sale or passing of the business. In addition to the ongoing legal issues that a business may encounter, here are just a few of the planning issues that owners will need to consider.
Most prospective business owners do not understand the distinction between entity formation and entity taxation. It is common for clients to say that their accountant has advised them to form an S-Corp, and then balk at the idea of an LLC. The fact is, you can have both.
A corporation or an LLC are formed under state law. An owner may select a particular business entity because of how it affects ownership, liability, or asset protection. After selecting an entity type, the business then makes a tax election under federal law. That election will determine how the business is taxed. It is common for an LLC formed under state law to elect taxation as an S Corp.
LLCs have become the most flexible and preferable entity for most operating businesses. They combine tax planning flexibility with administrative simplicity, legitimate asset protection, and a built-in plan for succession of interest after the business owner retires or dies.
LLCs provide a powerful tool for estate planning, too. Families who may not operate going businesses can still benefit from the protection and flexibility that LLCs provide, by creating a proven and reliable structure to manage and distribute family property to children or future generations.
A BSA is a lifetime contract providing for the transfer of a business interest upon the occurrence of one or more triggering events as defined in the contract itself. For example, common triggering events include the retirement, disability or death of the business owner. An interest in any form of business entity can be transferred under a BSA, to include a corporation, a partnership or a limited liability company. Also, a BSA is effective whether the business has one owner or multiple owners.
As a contract, a BSA is binding on third parties such as the estate representatives and heirs of the business owner. This feature can be invaluable when the business owner wants to ensure a smooth transition of complete control and ownership to the party that will keep the business going. Subject to certain Family Attribution Rules under Internal Revenue Code § 318, a BSA can help establish a value for the business that is binding on the IRS for federal estate tax purposes as provided under Internal Revenue Code § 2703.
Business Succession and Exit Planning
Have you been looking forward to the day you can retire, perhaps turn your business over to a son or daughter, or sell it? Even if you are not planning to stop working, you need to plan for the day you cannot run your business due to unforeseen illness or death. Most business owners do not take the time to plan for how they will leave their business. They are busy running the company, or they don’t know where to start. But if you continue to own a business until you die, it will be included in your estate and could be subject to substantial estate taxes. Your family could be forced to sell the business or its assets at ‘fire sale’ prices. Then you will have worked hard all these years so that the vultures and Uncle Sam, not your family, will reap the benefits.
Planning for how you will exit from your business should be an integral part of your estate and retirement planning. Proper planning now can provide you with retirement income, reduced income and estate taxes, and even let you benefit a charity if you so choose, regardless of whether you transfer your business to family members at discounted values, to employees, or to an outside buyer. In today’s market, the economy and trends are affecting the timing and value of business transfers.
Planning now to exit your company will result in you and your family receiving the best possible results, both now and after your retirement, disability or death. You can receive retirement income; you can transfer your business to your family, your employees or an outside buyer; you can make a difference for a charity or your community; and you can do all of this with reduced income, gift and estate taxes.