Michigan Estate Planning Blog

Corporations, Key Facts And Headaches To Avoid

Doing business is an activity. If you own a business, or are set to inherit a business, it is vital to know that you can continue to do business. Either way, remember to determine whether the business “structure” is the most appropriate. There is a significant difference between the C Corporation and the S Corporation. Fortunately, Forbes helps clarify the distinction in an article titled “Key Facts About Corporations, S Elections & Buy-Sell Agreements.” If nothing else, it might dissuade you from a “corporation” at all. Essentially, a corporation is always a corporation, but they do come in two flavors based on how you will be taxed. With an S corporation, the corporation will be “disregarded” and your personal profits from it will be taxed to you personally. On the other hand, a C corporation (generally larger in size) will be taxed as a separate entity all on its own before and in addition to any tax paid by owners. When you are doing business this taxation is clearly important (you hope to make some money, no?). However, when you are planning for the future and longevity of the business this is no less important. Perhaps some different business structures are worth considering. For example, you might jump for the newer, stylish and (maybe) more agile LLC or Limited Liability Company. If you have a corporation, then make sure you have a buy-sell agreement. The buy-sell agreement allows shareholders to agree how their shares will pass if one or more of them become disabled, retire or die. Otherwise, letting shares loose or in the wrong hands can even threaten the tax structure, never mind the health and longevity of the business in all regards. Then again, maybe you have a different plan for how ownership should transition. These are a few key facts worth knowing, and if you own or may soon inherit a business then there is much to learn about business ownership and business structure. There are many more key facts to know, and maybe there is work to be done in restructuring the business itself.

Reference: Forbes (March 18, 2014) “Key Facts About Corporations, S Elections & Buy-Sell Agreements”

For more information, see www.jerryreiflawyer.com

Mixing Business and Friendship Can Be Risky Mid-Michigan

Have you considered co-founding a new business with family or a friend? If so, you’re not alone. About half of all startups today are organized among friends, family members or spouses. It makes sense, too, because in today’s competitive business climate, startup entrepreneurs want to pursue their most ambitious goals with people they trust. However, when working with friends, expectations of loyalty and understanding are higher than is common among everyday work colleagues. And when friends let us down, resentments can linger and cause a deep divide in both work relationship and personal relationships. Here are five ways startup misunderstandings can spiral out of control and potentially end friendships, according to Fox Business. #1: Unmet Expectations. The typical startup business will take a lot more time and money to become profitable than anyone ever expects. #2: Work Style Conflicts. Even though friends get along great when hanging out at the bar, this compatibility may not resonate in the office environment. #3: Business Strategy Disagreements. New startup partners tend to be well aligned to the grander goals of an organization, but rarely have worked through the nitty gritty details of how to achieve these goals. #4: Spending Conflicts. One of the most common areas of disagreement is spending authority and budget priorities. #5: No Way Out. What happens when one partner wants to sell out, quit or reduce involvement in the business? A recent Forbes article, titled “Co-Founding With a Friend - - Without Decimating a Friendship,” shares a few words of wisdom from successful businesses founded by friends. One startup says “when making decisions, we make the conscious decision to not be disrespectful because at the end of the day, we want to stay friends.” Another startup recognizes the importance of keeping work and personal lives separate. In short, to avoid these business and friendship ending misunderstandings, it is important to discuss all issues that might interfere with productive business building.

References: Fox Business (June 13, 2011) “Why Co-Founding a Business Can Decimate Friendships”

Forbes (December 12, 2012) “Co-Founding With a Friend – Without Decimating a Friendship

For more information, see www.jerryreiflawyer.com

A Business “Break-Up” Between Co-Founders

Every beginning has an end, just as every business partnership will eventually expire. Whether the conclusion of the partnership is by choice, health problems, or death, one should have a plan in place to keep things amicable. As Stephen Covey noted so adroitly, one of the keys to effectiveness is to “begin with the end in mind.” Accordingly, the founders of a business should structure and run the business with a clear commitment to their shared ultimate goals for themselves and their business. In the vernacular of business planning, this oftentimes is called “exit planning.” If you fail to “begin with the end in mind” and make legal plans to memorialize the end game for your personal and business relationships, then you likely will only enrich lawyers. So, when it comes time to part ways down the road, what steps should you be taking now? The Wall Street Journal recently addressed this subject in an article titled “Breaking Up (With a Co-Founder) Is Hard to Do.” One key takeaway from the article is the “when and how” of exit planning. The best time to address the issue is when the business is founded. Consequently, the best way to memorialize the exit strategy in the event of the disability, retirement or death of a founder is through various legal documents created when the business is founded. For example, an Limited Liability Company (LLC) can use the LLC Operating Agreement, while a corporation may use its Bylaws or various Shareholder Agreements.

Reference: The Wall Street Journal (September 22, 2012) “Breaking Up (With a Co-Founder) Is Hard to Do”

The Tender Intersection of Your Estate And Business Planning

Planning for your estate is, more often than not, also an activity of coming to understand your estate and the nature of the things you own. If you’re a small business owner, it’s often more important to come to terms with the nature of your business and your ownership in it earlier rather than later. As pointed out in a recent article over at BusinessWeek, ownership is an integral concept to think through at the point of start-up, but it’s important to remember to think in the long-term, too. The shape that you give a business will, in the many ways discussed in the article, shape the way it is perceived and received by potential investors. Likewise, though, the initial allocation of rights and ownership will shape both the long-term capabilities of the business and the nature of the business assets that figure into your estate. The many complications and folds take time to understand, and often rely entirely on the individual circumstances, and for that reason it’s important to form a thoughtful plan, or risk losing sight of the long-term goals of the business and for your assets. To form a business, then, is a balancing act. While you balance between profit and loss, you also need to balance between present and future, to include between present business and future wealth transfers.

Reference: Businessweek (February 22, 2012) “Structuring a Business with Investors in Mind”