Welcome to FOCUS ON, The Law Office of Angela Odensky’s newsletter designed to provide critical information you need to know in order to plan for your future – both for yourself and those you love most. We kick off this quarter with an edition exploring the many facets of business succession planning including retirement, ownership transition, assumption by heirs, or death/disability of key owner(s).
WHAT IS A BUSINESS SUCCESSION PLAN?
A business succession plan allows a business owner to pass on leadership roles or to hand over their business in the event of an owner’s exit due to a variety of reasons including retirement, disability, or death — allowing the business owner to control what happens to the business. For a business owner, a succession plan often goes hand-in-hand with comprehensive estate planning.
Whether an owner chooses to leave his business to his family, key employees, or seeks an outside third party to purchase, a clear-cut, pre-transition plan outlines the owner’s intentions. If a business owner dies without proper planning and no directives in place, disposition of the business interests will be dictated by a last will and testament. If there is no will or a business succession plan in place, the business interests will pass per Texas statute, which may be in direct conflict with the business owner’s original intentions.
WHY IS A BUSINESS SUCCESSION PLAN SO IMPORTANT?
A strategic and successful business succession plan should cover both planned and unplanned occurrences. While you should seek a business succession plan at least five years prior to your planned business exit, a strategy to include death, disability, or incapacitation should also be in place for the unexpected. An attorney experienced in creating business succession planning to address multiple possible scenarios ensures your wishes are followed regarding the future of your business for any reason.
Whether an owner is transitioning the business to family or employees or seeks to sell outright, timely planning allows for the optimum setup to protect assets. At the basis of a properly structured business succession plan are key documents that an experienced attorney can either create or amend including operating agreements that name partners of the LLC; outline ownership transition (especially critical for business entities with multiple and/or non-related owners); establish buy-out terms; set terms for one child to assume the business in the event that the other child(ren) no longer wish to be involved; create viable buy-sell agreements; protect owners by establishing insurance policy requirements for all owners/key employees; and set terms for withdrawal in the event of retirement, disability, or death.
CASE STUDY: THE LACK OF A BUSINESS SUCCESSION PLAN POSES SIGNIFICANT ISSUES FOR A DECADES-OLD FIRM
A recent matter handled by the firm involves three colleagues who shared a vision over three decades ago by starting their own thriving company. Over the years their friendship and working relationship remains strong, but their visions have diverged. One partner essentially retired five years ago while still pulling full distributions; one partner is ready to retire now and struggles with the next best steps to achieve this; and the final partner has no plans to retire for several more years and wants to keep the status quo.
The common vision shared by the three colleagues did not include planning for its future. At no time in the decades together did they enter into an operating agreement that would outline exactly how the company would handle retirement of its primary members.
Now, as they age, the only concern isn’t just how to retire, it’s what happens if one of them dies and what authority a spouse inheriting part of the business will have on the remaining original members. Though that can be answered by state law, all of these questions and concerns can instead be addressed by the business via a well-drafted operating agreement. And, while nothing brings more satisfaction and pride than building a successful business with people you admire and respect, protecting that business with a thorough plan that anticipates its success and lays the foundation to create a legacy should be a priority for all business ventures.
Business succession and estate planning strategies can help guide you as you determine your individual business exit, initial public offering, acquisition, or succession planning.
ALL IN THE FAMILY
The most important consideration in any business planning is the people involved. For small, family-owned businesses, it’s crucial to know whether the next generation is interested in maintaining the business and in what capacity. Establishing whether one or all children want to continue the business helps guide your plan and protect the interests of all of your heirs.
While only 30% of businesses pass down to the next generation, there are many benefits to an established business entity when ownership transfers within the family. Benefits of continued familial ownership include minimizing tax costs; holding business assets in protected structures; continuing business cash flow post-succession; and ensuring a successful transition to intended family members.
In addition to the above benefits, maintaining ownership within a family strengthens and reinforces the foundational roots of a business and can keep the business thriving. Take for instance a scenario where not all children are necessarily interested in being a part of the family business, yet the family’s estate is wrapped up in the business. Business succession planning should be done in conjunction with traditional estate planning allowing that each family is different and the best way to determine the division of the estate/business will depend on the overall family dynamic. It’s crucial to understand that the children will not ‘just work it out amongst themselves.’ When it comes to the division of assets, it’s best to take the reins and set your children up for future success.
Handing over the reins of a successful enterprise can be highly attractive for an owner and a potential new owner. Choosing a family member(s) as your successor is a more viable option when children or other family members are already working within the organization.
Business succession and estate planning strategies can help guide you as you determine your individual business exit, initial public offering, acquisition, or succession planning.
LEGISLATIVE UPDATES AFFECTING BUSINESS SUCCESSION PLANNING
The Corporate Transparency Act of 2021
Effective January 1, 2024, the Corporate Transparency Act (CTA) creates reporting requirements for most small and closely held businesses created in or registered to do business in the United States. To help prevent criminals, terrorists, and other nefarious entities from hiding illicit money in the US, the CTA authorizes financial crimes and enforcement network (FinCEN) to collect information regarding “beneficial owners” of a company and disclose it to authorized government authorities and financial institutions. The rule requires the reporting company to provide name, birthdate, address, and a unique identifying number and issuing jurisdiction from an acceptable identification document
Though this rule doesn’t go into effect until the end of 2023, it’s important to make sure you’re ready to meet the reporting deadline. And, keep in mind if you are adding family members as part of your business succession planning, their information will need to be provided when the interests pass to them.
Regulatory Notice 22-23
Particularly geared toward baby boomers who are starting to retire, experiencing cognitive deterioration, or dying, the Financial Industry Regulatory Authority (FINRA) issued Regulatory Notice 22-23, providing guidance on a financial firm’s succession planning. The new notice gives a glimpse into the direction FINRA is taking on a firm’s business continuity planning and provides a list of questions that firms and business succession planning professionals can use to develop viable plans that minimize risk and maintain books of business. Further, it touts the benefits of early planning which include minimizing operational risk and maintaining and transitioning a business's assets. Though the Notice is more directed at professionals in the financial and securities industries, it offers advice and direction relevant to many service industries, even those not generally regulated.
HR 971
Introduced in 2021, HR 971 requires the Small Business Administration to establish a program to assist small businesses with developing and implementing business succession plans. Currently, the bill creates a tax credit for a business that establishes a succession plan. Send us an email at info@odenskylaw.com and we’ll keep you posted as this bill makes its way through The House.
A business succession plan outlining a successful exit strategy is necessitated for the following reasons:
Pending Retirement
Ownership Transition
Death, Disability, or Impairments of Owner(s)
Transfer of Business to Family/Heirs
The All-Important Operating Agreement
An operating agreement is foundationally the most important document governing a business’s operations and subsequent continuity. Angela Odensky explains why an operating agreement is critical to protecting assets in her newest video.
Additional Resources
The Law Office of Angela Odensky has developed an extensive informational reference library to help you find answers regarding Probate, Elder Law, Estate Planning, Business Succession Planning, and Guardianship.
Please contact Angela Odensky at info@odenskylaw.com or 713.344.0730. She is here to help you navigate this confusing and complex world.
Visit our website: https://www.odenskylaw.com/