Salt Lake City Estate Planning

Charging Order Challenges

Doubtless a large motivation behind the formation of many LLCs, as with Limited Partnerships (“LPs”) is that an LLC has so-called “charging order protection”… The charging order is widely misunderstood, so let me try to explain it.

Choosing the structure of your business is about more than just taxation. You want a structure that protects you from liabilities of the business itself. In fact, the very structure of your business is a means to protect both you and your business, so it’s worth understanding and maintaining.

Have you heard of charging orders? These are legal wedges creditors use to try and drive a wedge between you and your business. If your business is an LLC (Limited Liability Company) or an LP (Limited Partnership), then there is more you should know about charging orders, as detailed in a recent Forbes article titled “The Misunderstood Charging Order.”

While this is a complex subject, basically a charging order is a creditor’s first and last tool to extract your interests and capital from your business (assuming they don’t try to pierce the veil). In a corporation, a charging order can allow a creditor to actually gain a debtor’s stock interests in the business. This can be disastrous. “Limited” company structures are specifically designed with charging order protection, something that could be important to you as a business owner.  

The original article goes into greater detail, but essentially the charging order protection means that while a creditor can place a lien on your LLC membership interests and claim any distributions, a creditor cannot claim the membership interest itself and sabotage the business.

Certainly there is much more to know on the subject of asset protection, to include the subject of company structure. Although some of this discussion can become tediously academic, it’s important to understand where and how your asset protection vulnerabilities can arise.

Reference: Forbes (April 30, 2013) “The Misunderstood Charging Order”

Don't Let Your Family Business be Destroyed by Bad Succession Planning

Family businesses can be quite successful,...but the managing and intermingling of blood and commerce, insiders and outsiders, requires a deft hand, planning and enormous amounts of trust.

You might say that a family business is more than the sum of its parts. Unfortunately, those “parts” do not always see things the same way, whether it’s the family part or it’s the business part. Family businesses that successfully pass from generation to generation tend to toe the line in more ways than one.

For one of those all-too-possible horror stories of succession and family business gone awry, consider the case of the Luray Caverns and the Graves family. The Washington Post recently recounted the story in an article titled “The rift — a family dynasty fights over the future of Luray Caverns.”

The business of the Graves family was really an empire of various tourist businesses surrounding the Luray Caverns – the largest privately held cave system and tourism hotspot since the late 1800s. The family business apparently had been on a downward slope for some time. To make matters worse, this four generation family business has been in and out of litigation for the last ten years. In the end, not only has this discord threatened the family fortune and the business that built it, but the entire town associated with the family and the business.

More than a sad tale, this case is an object lesson for other family businesses and the original article is worth reading. With business succession planning, it is best to get the help of competent legal professionals long before it is time to pass the torch of the family business down the family line. 

Reference: The Washington Post (March 14, 2013) “The rift — a family dynasty fights over the future of Luray Caverns”

Limited Partnerships, General Liability?

It is better to never be a general partner if one can avoid it. But if a person is going to be a general partner of a limited partnership that is either conducting any substantial business or taking investors, they had better do their own asset protection first.

Personal asset protection is a major motivator behind creating a business entity through which to conduct business activities. For certain entities that means the protection of a corporate veil, but others are less safe.

On that note, a recent Forbes article titled “Miske: The Innocent General Partner Tagged With Liability For Losses Due To Misdeeds Of Another General Partner,” provides a word of caution when it comes limited partnerships via the case of Miske v. Bisno. In that particular case, one general partner in a limited partnership engaged in unwholesome activities, including embezzlement. Naturally, the embezzlement was discovered and led to a loss.

A limited partner then sued an entirely different general partner for the losses. The innocent general partner protested, arguing that he knew he was liable to third parties (which is bad enough), but not to limited partners in the same way. Unfortunately, the court didn’t agree, ruling that it doesn’t matter whether the suit is third-party or internal since a general partner is liable for the entity of which he or she is a general partner. As stated in the original article, “general partner” is just another way of saying “generally liable.”

When choosing and using an entity to protect your assets and your individual liability, be sure to consult competent legal counsel to help you navigate the land mines. 

Reference: Forbes (May 25, 2012) “Miske: The Innocent General Partner Tagged With Liability For Losses Due To Misdeeds Of Another General Partner”

Successful Family Business Succession Tips

Despite the particular challenges of running a family business, the successful ones recognize that their longevity depends on keeping customers, employees and shareholders happy. “We don’t like the idea of family business,” Andrew Cornell said. “We like the idea of business family.”

Getting the business started is one thing. While there are thousands of resources available to help a small business get off the ground, staying in the air is the real challenge.

Certainly, this challenge is uniquely complicated within the context of a family business.

Planning for the family business is as much art as it is science. Even though the law (science) is oftentimes fixed and immovable, the family dynamics (art) vary from one to the other. A recent article in The New York Times titled Family Businesses Learn to Adapt to Keep Thriving is not only spot on, but timely.

According to the Family Business Institute, only about 30% of all family businesses survive beyond the founding generation. Ouch, but it gets worse. Thereafter, the success rate drops to 12% after the transfer to the third generation.

The New York Times article identifies key traits common to a successful family business succession. One key to remember: If the business is a family business, then it is essential to treat the family as “family” and the business as “business.” In other words, avoid the temptation to “gift” positions in the business to family members, unless they truly are productive and motivated workers within the business itself.

In the end, what is best for you, your family and your family business will depend on many factors. Plan accordingly and enlist qualified business attorney early and often.

Reference: The New York Times (April 4, 2012) “Family Businesses Learn to Adapt to Keep Thriving”

 

The New Wealthy Show Their Tax Savvy

There’s nothing illegal about what these executives did. In fact, the Facebook registration statement and others that FORBES examined read like a playbook of how the ultra-rich and even the moderately wealthy can operate within the law to transfer vast sums and preserve assets–from the tax man and from creditors.

In case you missed it, there is something of a renewed technology boom underway. While the stars (read: Mark Zuckerberg, et al) of this boom seem to be ever younger, they are demonstrating some old-soul savvy when it comes to planning and structuring their current tax minimization and wealth transfer maximization.

In a sense, planning for and about wealth is always also planning about the future; that’s an important point even for those who already are “wealthy.” To glean some lessons from the rising technology stars, tap into a recent list of steps you can take, featured in a Forbes article aptly titled You Don't Have To Be A Billionaire To Plan Like One. 

I recommend clicking over to the original article, but the main takeaway is that classical “personal finance” is working hand in hand with classical “estate planning” in so many of these steps and “tricks.”

Reference: Forbes (April 3, 2011) “You Don't Have To Be A Billionaire To Plan Like One”

The Tender Intersection of Your Estate And Business Planning

In the early days of starting a business, you might be tempted to gloss over ownership structure, equity stakes, and other seemingly boring details. After all, you might think, as long as you keep taxes low, paperwork uncomplicated, and partners motivated, better to deal with the big stuff first. But these decisions can have a significant cost down the road…

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”

 

 

Retirement Perspectives from Small Business Owners

Retirement plans have their place, but many entrepreneurs starve their business of needed working capital by putting money instead into tax-deductible accounts such as traditional 401(k)s. They think they are saving taxes. 

Small business owners, by and large, have a hard time thinking beyond their business. It is a significant part of their very lives. If you are a small business owner, now may be the time to start thinking of your business as its own retirement vehicle, at least according to a recent guest columnist over at Forbes.

For retirement planning, a business owner typically has to take out of the business what would otherwise be capital for growth. You’re taking it out to put into a tax advantaged plan like a 401k, hoping it will grow there enough to make up for the taxes to be paid later. In addition, you are doing so in the belief that you’ll be in a lower tax bracket when you call upon those funds later on. But what are the returns on that account? It may be that a properly capitalized company will give far greater returns.

According to the Forbes article, a small business owner has to exist in a couple capacities, and the self that is an “individual” cannot be eclipsed by the self that is the “business owner,” nor the other way around. Ideally, perhaps, they can work in a synergy.

It is a risky strategy, especially for those nearing retirement, but it may be worth looking into the original article’s numbers.

Reference: Forbes (January 25, 2012) “Fund Your Business Before You Stuff  Retirement Accounts”

Please visit the Estate Planning for Small Business Owners section of our website and contact us today to see how we can start helping you.

 

Small Business “Smoke And Mirrors”?

The government’s top official charged with advocating for small business is now a member of the White House cabinet, President Obama announced.

There’s a lot of movement on Capitol Hill these days, or at least there is the potential for it, and it’s largely in the name of small business. President Obama has recently expanded his cabinet with the addition of the chief of the Small Business Administration (SBA). 

Is it going to work for you?

As reported here in Businessweek, and in many places beyond, President Obama has launched an initiative to reorganize and condense six of the agencies responsible for various segments of the economy, not least of which being the SBA.

There is still concern that it may end up being a largely symbolic gesture, and perhaps also only a pre-election “political move.”

So, how will it affect you?

According to Robb Mandelbaum over at the New York Times, the reaction is mixed amongst small business persons.

Reference: Bloomberg Businessweek (January 13, 2012) “Obama Makes SBA Chief a Cabinet Member”

Please contact us to see how we can help with all your small business needs.

“Family” Is Key To Family Business Success

The findings, the investigators pointed out, indicate that the key wealth creation vehicle is not the firm but the family

 

Legacy companies – those incredible companies that have lasted for generations within a family, some 100 to 150 years, and continue to grow – occupy a special place in the American imagination and even more so in the hearts of entrepreneurs. In fact, for most thinking people, there is a special appreciation for the care and planning necessary to start a company and keep it going for a short time, never mind for entire generations.

Indeed, Legacy companies are a rare breed. Many family companies will simply never get there. Fortunately, there is heartening news in a recent study that suggests that the duration of a family company is not quite so important, for all its branding glory, as the duration of the family itself.

As related in Family Business Magazine, the Family Firm Institute – a global association of researchers and advisers – has conducted a three year study: the “FFI/Goodman Longevity Study,” completed in 2010. By surveying some 500 senior family-firm executives they discovered that just 10.6 percent of family enterprises owned just one business. The average is actually closer to 3.4 businesses, with 21.3 percent controlling five or more businesses, and an average of 6.1 companies over a family history. What does all of this mean? Simply put, single companies are not the measure of enterprise, especially not in a family. The family itself is the asset and the drive that moves matters forward across time, generations, and changing markets.

As you plan for your business - and for your family - this may be an essential thought to bear in mind, and one to foster in others. As noted in the original article:

Families with a trans-generational orientation view the legacy company broadly rather than narrowly. Though they lovingly tell their children tales of the original business model and the town where it first took root, those aspects are just part of the family story. They place their emphasis on the founder’s entrepreneurial spirit, attention to the marketplace, flexibility and sense of stewardship. This perspective raises the odds that the family will prosper as an economic unit over many generations, no matter what form its wealth-creating entities take.

 Reference: Family Business (November 2011) “Family Business Longevity Examined in a New Light”

 

 

LLC Planning For Your Business and Family

I am frequently asked by small business owners if they should have a separate LLC or multiple LLCs for their assets. The answer is “it depends” on what your objective is for considering this.

When it comes to understanding your estate and planning for it, the key concept is ownership. How do you own your assets? How should you own your assets? How can you easily pass along this ownership to your loved ones?

When it comes to business assets, whether in the context of ordinary day-to-day operations or as a business owner setting up your estate plan, ownership is still the name of the game. One question that arises, then, is whether your assets should be spread across separate or multiple LLCs.

I came across a recent article in CPA Magazine and, according to the author, whether you should start splintering your assets into multiple LLC depends a great deal on what you hope to accomplish. No surprise there.

However, to many it’s simply a question of liability and risk protection, but then there are other goals. Namely, splitting into multiple business entities will allow your company to move the ownership of assets around between family members or employees without necessarily dividing the business.

This can be accomplished with some careful planning, corporate due diligence, and transactions like the sale-leaseback or, more in the vein of estate planning, the gift-leaseback. In that latter play, the business owner either leases or gifts the asset away and then immediately leases it back, thereby spreading ownership but retaining the operations of the company. Of course, not all business assets are well equipped for this practice, but others are perfectly positioned, especially those that deal in large equipment or vehicles.

It’s not quite as simple in practice, and diligence is a necessity, but for many small and family owned businesses this fractured structure will allow a great deal of leeway.

Whether it truly is right for you will take some thought and competent counsel at your side. In the end, it all comes down to your own unique goals, first for your business and second for your family.

Reference: CPA Magazine (2011) “How to Determine if a Separate LLC is Right for Your Assets”

Please visit our website for more information on how we can help with your LLC planning.