Most business owners desire growth but may not have a sound plan or idea of how to achieve it. If you are looking for ways to grow your business, then you need to fashion a plan for how to achieve it. For instance, you will want to consider:
Your goals and objectives. This may include increasing market share, increasing profitability, expanding to other cities or states, improving customer relations, hiring skilled workers, and others.
Expect the unexpected. Is your business equipped to iron out disputes or differences between the partners or owners with a dispute resolution procedure? An unforeseen death or disabling injury or illness of a partner or co-owner can seriously impact your continued operation or profitability unless you plan for these unexpected events.
Limit liability. What is your business entity, and can it limit your personal liability in its current form?
Exit strategies. What happens if you or a partner or co-owner decides he or she no longer wants to remain in business? How is your or that person’s interest to be valuated, and what are the terms of sale? Can anyone purchase that interest? What if the business is failing or you want to sell it?
With these considerations, here is a checklist to get you on the right track for the coming year:
1. Your Business Organization
The Right Business Entity
How would you like your business to be set up? It can be a sole proprietorship, limited liability corporation (LLC), limited partnership (LP), or a corporate entity. There are advantages and disadvantages to each regarding tax treatment, limiting liability, mode of operation, ownership of stock, and other issues that your business attorney can discuss with you.
Real Estate and Separate Operating Entities
You can create a separate entity that can own your building or other business real estate and rent it to an operating business. Owning real estate in a separate LLC from your operating business is an effective way to limit personal liability, may reduce your taxes, and allows for an easier transition of the business during retirement or the sale of the business.
Shareholders’ Agreement/Operating Agreement/Partnership Agreement
If your business has more than one owner, a document to govern the relationship between owners is critical. Depending on the type of entity, this document would be called Bylaws, a Shareholders’ Agreement or Stock Restriction Agreement, Partnership Agreement or LLC Operating Agreement.
If you have an existing document, it may need to be reviewed and revised. These documents should address the following:
- When can shares/interests be sold?
- How are decisions made? Do certain important decisions require extra approvals?
- Are minority owners protected?
- Are capital contributions required/permitted?
- What are the rights and responsibilities of each owner?
- If an owner wishes to retire or leave, what is the process?
- What happens if an owner passes away? What are the rights of their heirs?
- What benefits and salaries will be enjoyed by the owners?
Regarding selling your business or a portion of it, you will want a buy-sell agreement included in the governing documents. Knowing how the business or an owner’s interest will be valuated and by whom and the terms of the sale provides stability and a degree of certainty. Certain events–such as death, disability, divorce, the death of a spouse, or a tender–can trigger a valuation of interests and sale. If a co-owner does leave, you will also want a non-compete agreement that is validly drafted and enforceable.
Don’t Forget Insurance
Insurance is critical for liability protection. Make sure you have adequate insurance, and your contracts require those you work with to have adequate insurance and to provide you with proof.
Life insurance can also be used to fund the buy-out of an owner’s interest in case of their death or disability. Buy-out provisions should be carefully drafted to ensure that adequate funds are available if a buy-out is triggered by death or disability. For example, if an owner can be bought-out if they become disabled, make sure the buy-out language matches the language of the disability insurance that would fund the buy-out, so the remaining owners have sufficient available funds.
2. The Business Operations
Services Agreements/Terms and Conditions/Supply Agreement
Have your business attorney review your current services and supply agreements along with their terms and conditions. Your attorney will review the terms of sale, confidentiality provisions, credit terms, guarantees, warranties and limitations, remedies for breach, indemnification, and insurance requirement provisions.
If you will be leasing property to or from another business or individual, your attorney will need to draft a lease agreement that will define each party’s duties and what happens in case of breach, allocate liability when certain events occur, state if and how the lease will be renewed and on what terms, require rental insurance, and potentially include an option to purchase.
If you have a number of employees, you will want to protect yourself and your business by having them properly classified, trained, and aware of company policies, expectations, benefits, salary terms, and other provisions. Consider having your attorney draft:
- Employee manual
- Employee contracts
- Independent contractor agreements
- Confidentiality agreements
- Covenants not to compete
3. Continuity During Incapacity or Death
Do you know what to do in case of a crisis? For instance, several customers get food poisoning at your restaurant, someone is hurt on the job, an employee is accused of sexual harassment, or a key player dies or becomes disabled. You should have a plan and a key person to handle the corporate response and legal aspects.You will want to restore order, prevent further damage, and gain control of the situation.
Personal Planning Documents
Protecting your own assets and health and providing for the smooth transfer of your assets to your heirs is just as important to maintain and grow your business.
Some legal documents to consider include:
- Will–A Will names a personal representative, passes personal property to your heirs, and names a guardian for your minor children. A Will is filed with the court upon your death and transfers your assets to your heirs through probate.
- Living Trust–A revocable Living Trust is similar to a Will, and it can be changed during your lifetime or terminated. A Living Trust is a private document that is often used to avoid the costs and delays of probate.
- Marital property agreement–In a divorce, assets acquired during marriage are distributed pursuant to Wisconsin’s community property laws where one spouse is entitled to 50% of the marital property, including business interests. You should have a process to protect your business interest in case of divorce. If you are planning to marry, consider a prenuptial agreement where this issue can be addressed prior to marriage.
- Durable Power of Attorney for finances (DPOA)–A DPOA appoints an agent to handle and make the important and material decisions for you in case you become incapacitated. This can occur from an accident, serious illness, or dementia. Your agent can possess limited or broad power to make decisions regarding your business, bank accounts, real estate, and other money transactions.
- Living Will/Health Care Power of Attorney
Similar to a DPOA for finances, a Health Care Power of Attorney allows you to appoint an agent to make the important decisions regarding your health care and medical payments should you be cognitively unable to make these decisions on your own. A Living Will applies if you are terminally ill or in a permanent coma and states your desires in that situation.
4. Succession Planning
Operating Agreement or Shareholder’s Agreement
Include in these documents how your business or business interest is to be transferred in the event you pass away or become too disabled to make your own decisions.
You can designate in your Will or Living Trust who will inherit your business interests or will operate it. Generally, you should consider if the business interests will be distributed off the top, or if they will be distributed as a part of an heir’s share.
Durable Power of Attorney
As indicated above, you can appoint an agent to handle your financial decisions in case of incapacity, which can include the succession of the business to a relative, associate, or other persons or entities by sale, so long as it is in your best interests and the agent is acting within his or her fiduciary responsibilities.
You are allowed to gift up to $14,000 annually to any one person, which will increase to $15,000 in 2018. A husband and wife can each gift this amount to an person, so together they can gift $28,000 in 2017, or $30,000 in 2018. If the estate tax is applicable to your situation, this can reduce your risk of being subject to it.
Sale to Family Member, Third Party, Employee
If you plan on selling your interest, you want an accurate appraisal and advice on a reasonable sale price. A sale of a business can be achieved in a number of ways including structured payments or installments. Have your attorney draft the purchase terms that can minimize tax and other liabilities.
Revocable Living Trusts are commonly used to avoid probate and offer several advantages. By transferring ownership of property to a revocable Living Trust, you no longer own the property, but you may retain total control over the assets as the trustee and may amend or terminate the trust during your lifetime. You may also name a successor trustee upon your death, or a co-trustee to assist you during your lifetime.
A Living Trust can be created to avoid probate for real estate, bank accounts, money market accounts, motor vehicles, boats, stocks, bonds, mutual funds, art, patents, or virtually any other asset.
A “Pour-Over Will” is often used as a companion to a Living Trust. If an asset is inadvertently left out of the Trust, the Pour-Over Will can be used to transfer the grantor’s remaining property into the Living Trust at the grantor’s death. The Pour-Over Will is also used to name guardians for minor children.