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Entries in family business (4)

Friday
Aug122016

Game Changer? Succession Planning Targeted by IRS

by Michael Hackman and Kira S. Masteller

Tax Attorney EncinoCertified Tax Law Specialist Trusts & Estate Planning

The Department of the Treasury wants to place limitations on valuation discounts that are currently commonly used to reduce asset values in family-owned and closely-held businesses, in an effort to increase tax revenue. The Treasury released proposed new regulations to that effect last week. If approved, the Regulations would revise Internal Revenue Code Section 2704.

Under current rules, through estate planning, individuals can transfer significant assets to the next generation at discounted values – primarily by transferring fractional interests in real property and businesses. Generally, family relationships are disregarded when determining the fair market value of an asset at the time of transfer.

The fractional interests – let’s say 10 percent limited partner interests in a Family Limited Partnership (FLP) with a net value of $4 million are transferred to each of four children – the interests are characterized as having lack of control and lack of marketability. Such characterizations have allowed appraisers to justify significant, so called minority discounts regarding the fair market value of the  minority interest in a business.

For example, if the FLP interest is appraised at a 25 percent discount, each of these gifts with an underlying value of $400,000 would be valued for estate or gift tax purposes at $300,000.

If the Treasury Department’s proposals are enacted, and this could happen by year end, key trust and estate planning tax-saving vehicles will be less effective, or curtailed altogether. The new Regulations could also affect the terms of an entity’s operating or partnership agreement. 

There is no doubt that if these regulations go into effect, they will be vigorously challenged by estate planning attorneys. While these challenges will be based on a variety of technical arguments, there is no assurance that they will prevent the IRS from taking the proposed action. 

There also is no way to predict how these regulations might affect discount appraisals. The key to obtaining a significant discount is to obtain a proper appraisal that has an additional discount analysis. Appraisers may be less willing to confirm aggressive discount appraisals in light of the proposed regulations. 

In any case, family business and property owners who intend sometime to give or leave their business or property to family members should strongly consider taking advantage of the presently available discounts before the new roadblocks are placed in their way.

 

Michael Hackman is a Certified Specialist in Tax Law, and Chair of our Tax and Trusts & Estate Planning Practice Groups. Kira S. Masteller is a Shareholder in our Trust & Estate Planning Practice Group. 

Disclaimer:
This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only, to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for obtaining legal advice from a licensed professional attorney in your state.

Wednesday
Jul252012

Business Succession Planning: The Shareholder, Operating or Partnership Agreement

 

by Robert A. Hull

 

For many of us, one of our most valued assets, is our business. What happens when you or one of your business partners becomes disabled, divorces, retires or passes away? Will your business continue to function smoothly?  Will there be infighting between owners or spouses/estates/children of owners?  

Hopefully, you established procedures for some of these scenarios when you started your company. If you didn't, you need a business succession plan. Here's a hypothetical to illustrate why:

You co-own a custom wing-nut company that manufactures state-of-the-art custom wing-nuts for almost any industry that uses this type of fastener, with a partner who is married with three children. You are also married, with three children.

However, you've never gotten along with your partner's spouse, who you think is spoiled, grasping and just plain annoying. Worse, your partner's three kids all embody many of the same negative traits.

To further complicate matters, your own spouse worked from home throughout your own marriage, raising three mostly good kids . . . a great parent, but not in the least bit business minded.

Your kids are a mixed bag. Two work for your company. One is creative – he came up with the brilliant idea of fluorescent wing-nuts which are selling like proverbial hotcakes. The other is financially-minded, the one who ensured you made the biggest profits possible on the project. The third kid just likes to head off to Las Vegas a lot. Frankly, you're a little worried.

Some of the questions you should be asking at this point are:

  1. What happens to your company if your business partner passes away or becomes disabled, divorced or simply wishes to sell his or her share of the business? Will you suddenly be partners with his or her annoying spouse and three, bratty children or with a stranger?

  2. What happens to your own interest and your company if you should become disabled or pass away?

It is crucial that you put into place a plan to address the above scenarios before any of them manifest.

Business succession planning may sound complex, but it's really a lot less difficult than leaving everything up to fate or "crossing those bridges when you come to them." No good comes from kicking the can down the road.

 

The Shareholder/Operating/Partnership Agreement – Defining Intentions and Handling Disputes

 

Business Succession AttorneyA Shareholder Agreement (for a corporation), Operating Agreement (for an LLC), or Partnership Agreement can provide some answers to these questions. 

It will clarify what you and your business partner intend for your company, and can provide guidelines for handling future disagreements. The agreement (sometimes referred to as a “buy-sell” agreement), or in some instances the governing documents of the business itself, should set forth:

  1. The respective ownership interests of the business partners.

  2. The next steps to take when an owner resigns or retires, becomes disabled or dies, or files for personal bankruptcy (e.g., buyout provisions, rights of first refusal, etc.;

  3. The valuation of the stock or interest;

  4. If your company will buy out the departing or deceased shareholder's stock or interest.

All of these issues, and more, should be addressed in a good Shareholder/Operating/ Partnership Agreement to avoid the business pitfalls resulting from a change in personal circumstances.  An ounce of prevention is worth a pound of cure.

Disclaimer:
This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only, to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for obtaining legal advice from a licensed professional attorney in your state.

Tuesday
Sep202011

When to Franchise Your Business - 7 Questions to Ask

Franchise Agreement LawyerState Bar Certified Specialist, Franchise & Distribution Law

 

by Tal Grinblat

818.907.3284

 

When to franchise, or not to franchise. . .that is the question many business owners routinely ask themselves.  There are certain guidelines and considerations companies can assess in deciding whether or not it’s time to franchise.  Here are some considerations:

If you’re content with the size of your business, your income, the positioning of your brand in the marketplace, the breadth of work involved in maintaining your business...then perhaps franchising is not for you. 

But if you want to grow your business and look forward to having new challenges to overcome, one very effective way to do so (with the added benefit of using other people’s money)  is through franchising. 

In deciding when to franchise, you should consider these questions:

1. Are You Profitable? Will Your Franchise be Profitable for Others?

This may seem like a no-brainer, but you’re not going to find people who want to buy into a struggling business model. And if you’re thinking franchising your business will actually turn diminishing profit margins around, it won’t.

You’ll need to take a look at why you are profitable and whether or not your income depends on fads, or solid products and services which can be turned into sustainable profits for years to come.  Franchised concepts that do not make a profit for their owners will not survive long, and may also lead to litigation.

2.  What is Your Business Model?  Will You Attract a Large Pool of Franchisees?

If entering the franchise will be too cost-prohibitive for potential licensees, you may not get many buyers. Franchising a new cleaning company for example, could be affordable to many people looking to break into business ownership. Franchising space travel launching pads would only be feasible for certain billionaires.   

3. Why Franchise Your Business? What are you offering that’s new?

You should consider your company’s unique traits that make you different and better than your competitors. If you’re not sure you have any unique traits that differentiate you from others, it may not be the right time or business to franchise.

4. Is Your Concept Replicable?

If your franchise concept is too dependent on your special qualities and traits which other franchisees may have difficulty replicating, franchising may not be for you. For example, a magician with unique skills and abilities may have difficulty franchising his magic concept if others cannot replicate these unique abilities.

5. Are You a Good Leader?

Are you prepared to offer support and training, and how much of it are you willing to provide? Many people who buy franchises are looking for guidance as they break into business ownership. But if you find it difficult to relinquish control, provide ample hand-holding for others, or are compelled to micromanage every last detail, selling franchises may not be an option for you.

6. How Will You Grow Geographically?

Imagine moving your business model from Los Angeles (or wherever your original store is headquartered) to Riverside. Will it still do well? Now try imagining it in Boise or Miami. If you think your concept will still draw customers and be profitable in many geographies, your business might make a good franchise.  However, if your concept is geographically dependent, like a windsurfing training camp, your market area for franchising may be more limited.

7.  What is the Regulatory Climate for your Business?

You should also consider specific regulations for your business. Are there certain states or geographies where your franchise will not succeed?  Will you need special permissions in local, county or state governments for your business? You’ll need to do plenty of due diligence before launching into franchise agreements.

When to franchise is always a tough question for business owners wanting to expand operations. Hopefully some of the questions above can help you start thinking about your available options.

Tal Grinblat is a California State Bar Certified Specialist in Franchise and Distribution Law. He can be reached via email: tgrinblat@lewitthackman.com.

 

 

Disclaimer:
This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only, to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for obtaining legal advice from a licensed professional attorney in your state.

Thursday
Sep152011

Buy Sell Agreements – Protecting Your Interests From the Four Ds

Trusts & Estate Planning

 

by Kira S. Masteller
818.907.3244

 

Buy sell agreements are common estate planning tools for people with business partners. They ensure the continuity of the business in the event of the death, disability, retirement or withdrawal of one or more of the principles.

If you run a successful company with a business partner, you should consider executing a buy sell agreement to protect your own interests, as well as those of your family. Here are some scenarios to consider:

1. Death

▪ When a principle dies, will that person’s stock be repurchased, or can he or she leave that stock to a person of his or her choice? To assure the continuity of the business, it is usually best to repurchase the stock.

▪ Will the repurchase, if any, be done by the corporation or the other shareholders? This involves business and tax issues which will need to be discussed one on one with your attorney, since individual situations vary.

▪ A proper repurchase arrangement requires the use of life insurance, which also needs to be discussed in person to address your unique needs. For example, in a corporate redemption situation, if there is a $500,000 purchase price, the corporation will likely not have sufficient assets to pay that purchase price. Generally, life insurance is used for these purposes. (Be sure to read my previous blog, “Your Life Insurance Review” to understand why it’s important to keep your policies up to date.)

2. Disability

▪ If a principle becomes disabled, will s/he continue to receive salary and benefits? If yes, for how long? That person cannot receive salary payments indefinitely, because at some point those payments will be deemed to be dividends, which is subject to double tax.

▪ Will a disabled shareholder’s stock be repurchased? If so, we will have to discuss how the payments will be made, since life insurance will not be available for this purpose.

▪ Some of these issues can be addressed in employment agreements.

3. Departure or Retirement

▪ Will a shareholder’s stock be repurchased in the event s/he retires or withdraws? Typically, this does not happen because it places an economic drain on the corporation.

4. Divorce

▪ If your partner separates or divorces, will that put your interests in the company at risk? A buy sell agreement can protect you or your partner from unforeseen events like this.

If you co-own a business, it might be time for you to consider the future of your company and maintaining financial interests for yourself and your family. Buy sell agreements are one of the best ways to protect those interests from unforeseen events.

Kira S. Masteller is a California Trust Attorney and Shareholder in our Tax and Estate Planning Practice Group. You can reach her at 818.990.2120.

 

 
Disclaimer:
This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only, to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for obtaining legal advice from a licensed professional attorney in your state.

 

 

LEWITT HACKMAN | 16633 Ventura Boulevard, Eleventh Floor, Encino, California 91436-1865 | 818.990.2120