Business Succession

As we enter a new tax year, we have new exemption and exclusion amounts which have been adjusted for inflation.

The Federal Unified Credit for Estate and Gift Tax is now $5,430,000

The Federal GST Exemption is now $5,430,000

The Federal Annual Gift Tax Exclusion remains at $14,000

The Federal Estate and Gift and GST Tax Rates remain at 40%

Florida continues to have no state gift or estate tax

As always, an estate planning attorney should be consulted on the best way to save on estate taxes. Please contact our office to schedule an appointment to discuss your specific situation.

In an effort to shield their personal assets from liability for creditors and debts associated with their business, many business owners are advised to set up corporate entities. The type of corporate entity depends on the type of business, number of shareholders and other factors but the benefits are virtually the same. Creating a business entity protects the owners assets from being seized to pay any judgements or debts associated with the business.

However, many business owners who become clients of our firm are never properly advised that a failure to maintain certain formalities with regard to the corporate entity will defeat the liability protection afforded by the entity. Creditors have the ability to "pierce the corporate veil" to seek payment of judgements or debts directly from the personal assets of the owners. In order to maintain the corporate veil, the entity must be operated as a business with separate bank accounts, annual meetings and accurate records. Otherwise, the court will determine that the entity is merely an "alter ego" to the individual owners wherein the liability protections afforded by the entity are disregarded in favor of holding the individual owners personally liable.

Here are some examples of formalities that should be observed to maintain the liability protection afforded by a corporate entity:

a. Corporate Records Book. The corporate records book and financial records should be properly and consistently maintained. In Florida, the shareholders and board of directors of the company must have an annual meeting. A record of the annual meetings should be executed by the shareholders and directors and kept in the records book. The stock certificates evidencing the shareholders and their shares should be issued and a separate list of outstanding certificates should also be maintained in the event a certificate is lost or accidently destroyed.

The contents of the meeting minutes should include the date, time and location of the meeting, the names of all officers and directors at the meeting, approval of the prior meeting minutes, resolutions regarding issue discussed and voted on, a record of the voting, (for example, was the vote unanimous, if anyone abstained). Generally speaking, any major changes or decisions relative to the business’s structure or contracts should be voted on and ratified in the minutes. Some examples of dealings that should be reflected in the minutes include, but are not limited to: reorganizations and mergers, elections of officers and directors, loans, leases or any significant contracts.

b. Capitalize. The entity should be funded by purchasing shares of the corporate stock, which as indicated above, will result in stock certificates being issued to the shareholders.

c. Asset Separation. The business finances should be maintained totally separate from those of the individual shareholders. The corporate entity should have it’s own bank accounts and credit cards

d. Dividends. If the entity is required to pay dividends and fails to do so, the court may treat the entity as an alter ego.

The most important issue to understand when using a business entity for liability protection is that simply creating the entity is not enough and in order to maintain all the perks provided by the protection, the owners must make an annual or more frequent effort to maintain the records in order to prevent a creditor from "piercing the corporate veil."

A Limited Liability Company ("LLC") is a hybrid entity which for tax purposes, is considered "pass-through." This means that a LLC offers a less complicated tax structure like that of a partnership or sole proprietorship. However, from the asset protection perspective, the LLC has the liability protection afforded by a corporation. A LLC has "Members" instead of "Shareholders" and "Managers" instead of "Directors." The Members of a LLC own interest in the company and may provide the managerial functions necessary for the LLC to operate. Or, the Members may elect a separate individual Manager to perform the managerial functions. A LLC has a relatively low set up cost with the State of Florida and the annual filing fees are minimal as well.

Now that you know the LLC structure, should you have an LLC?

The right kind of business entity will depend on several elements that may be applied to your specific situation and objectives.

Let’s start with what an LLC can do for you:

1. A Member of a LLC is limited in personal liability for the business assets and operations. Basically, your liability is limited to your contribution to the LLC. For example, we often recommend a LLC for a client who owns a piece of rental property. The LLC creates a balloon around the rental property so that if the LLC is sued, the Member’s liability is limited to the value of the property itself, and all of the Member’s other assets are protected.

2. As we already pointed out, a LLC is a "pass through" entity for federal tax purposes. This means that Members report profits and losses for the entity on their individual tax returns. Members may also share in the tax deductions available to the LLC. However, depending on your income tax bracket, this tax structure may not be beneficial to you.

3. Another advantage of a LLC is the operational structure. There does not have to be a separation of power among those owning interest in the company and those running the company. In fact, the default assumption of Florida Revised Limited Liability Company Act is that all LLCs are managed by their Members unless otherwise indicated to be Manager managed. This provides an ideal structure for small business owners and even sole proprietors who can limit their liability while still running the Company.

4. In addition, a LLC provides a great vehicle to transfer wealth in estate planning. Real Property may be transferred into a LLC and then interests in the LLC may be gifted on an annual basis while still qualifying for the federal annual gift tax exclusion. In addition, the LLC provides the foundation of a Family Limited Partnership which is a useful tool for transferring family owned business interests to the next generation at a discounted value.

Now, what are the drawbacks of an LLC?

1. Although we do not have income tax in Florida, the paperwork required to maintain an LLC is a concern for some of our clients. There are IRS filing requirements for informational returns even though no tax is reported under the LLC entity. Additionally, the Florida Department of State requirements for annual filings are more cumbersome than simply operating without the LLC.

2. Also, if you are a professional, providing services that have licensing requirements or some sort or certification or registration requirement overseen by the State, like an attorney, a doctor or an accountant, to name just a few, then a simple LLC is not the proper entity to run your business. You must have a "Professional Association" designation, and this type of entity does not limit your liability for professional malpractice.

As with any estate planning vehicle, there is no "one size fits all" that will provide the best plan for everyone. Please give our office a call to schedule an appointment to discuss whether a LLC would suit your specific needs.

Family Business: Preserving Your Legacy for Generations to Come

Your family-owned business is not just one of your most significant assets, it is also your legacy. Both must be protected by implementing a transition plan to arrange for transfer to your children or other loved ones upon your retirement or death.

More than 70 percent of family businesses do not survive the transition to the next generation. Ensuring your family does not fall victim to the same fate requires a unique combination of proper estate and tax planning, business acumen and common-sense communication with those closest to you. Below are some steps you can take today to make sure your family business continues from generation to generation.

• Meet with an estate planning attorney to develop a comprehensive plan that includes a will and/or living trust. Your estate plan should account for issues related to both the transfer of your assets, including the family business and estate taxes.
• Communicate with all family members about their wishes concerning the business. Enlist their involvement in establishing a business succession plan to transfer ownership and control to the younger generation. Include in-laws or other non-blood relatives in these discussions. They offer a fresh perspective and may have talents and skills that will help the company.
• Make sure your succession plan includes:  preserving and enhancing “institutional memory”, who will own the company, advisors who can aid the transition team and ensure continuity, who will oversee day-to-day operations, provisions for heirs who are not directly involved in the business, tax saving strategies, education and training of family members who will take over the company and key employees.
• Discuss your estate plan and business succession plan with your family members and key employees. Make sure everyone shares the same basic understanding.
• Plan for liquidity. Establish measures to ensure the business has enough cash flow to pay taxes or buy out a deceased owner’s share of the company. Estate taxes are based on the full value of your estate. If your estate is asset-rich and cash-poor, your heirs may be forced to liquidate assets in order to cover the taxes, thus removing your “family” from the business.
• Implement a family employment plan to establish policies and procedures regarding when and how family members will be hired, who will supervise them, and how compensation will be determined.
• Have a buy-sell agreement in place to govern the future sale or transfer of shares of stock held by employees or family members.
• Add independent professionals to your board of directors.

You’ve worked very hard over your lifetime to build your family-owned enterprise. However, you should resist the temptation to retain total control of your business well into your golden years. There comes a time to retire and focus your priorities on ensuring a smooth transition that preserves your legacy – and your investment – for generations to come.