Business Succession Planning William A. Price Attorney at Law www.growthlaw.com 1-800-630-4780
Business Lifecycle Law Work Sale Or Planned Transfer: At What Value? Cut Transfer Taxes: ESOPs, Estate Plans Protect The Asset: Contracts, Litigation Incorporation Capital Additions, Control, & Buy-Sell Agreements Advisor Work Needed Startup to Exit
Agenda 1. Business Issues: Harvest Or Chaos? 2. Buy-Sell Agreements And Other Succession Or Closing Legal Issues 3. Business Sales To Outsiders 4. Disability, Retirement, and Estate Plans
Bad Faith Is Everywhere Brown’s Chicken: Bankruptcy to protect the convicted felon (daughter of original 67% partner) and parent from $882,00 owed former 33% partner, for breach of fiduciary duty (Popejoy, J., 10/28/2009 judgment, DuPage) Source: http://newsfeedresearcher.com/data/articles_b1/brown-portillo-company.html
Don’t wait until you need to sell : process takes all your time, disrupts operations, can hurt value
Too much payout over short time kills the goose that lays the golden eggs : Key-person life insurance may not cover all the value, so partners have to pay huge amount of profits to buy out the widows: partnership will dissolve
Subchapter S Corporations convert to C Corp.: 10 Years to exit, or you may have “built-in gains”
Partnership distributions could be:
(1) Taxed as “disguised sale” under Sec. 707 if within two years of capital contribution;
(2) Sec. 704(c)(1) sale to other partners of “hot” assets if distribute to them within 7 years
Exit Events And Plan Actions Planned Harvest Death Retirement Bankruptcy Maximize Value With Business Profits Minimize Taxable Estate With Gifts, ESOP, Life Ins., Etc... Funded Buy-Sell Agreement With Clear Basis and Good Accounting Asset Protection For Owners And Family: Multiple Entities
Attorney General’s Office: for nonprofits, reports required to Charitable Trusts division
Industry-specific regulators have specific termination reports and forms for their regulated entities and individuals (e.g. IL Commerce Commission for utilities, Ill. Commissioner of Banks and Real Estate for such organizations, Ill. Department of Professional Regulation for same).
Grantor retains an interest: gets an annuity for a period of years, only transfer to be taxed is the remainder interest in the assets supporting the annuity (IRC 7520), and if grantor survives period, trust assets not in grantor estate
Business is sold (usually to family members who carry same on in next generation) with periodic installment payments, but note cancelled as of seller’s death: may be taxed as annuity, but interest part deductible to business, and stepped up basis for asset on seller’s death
Combines with SCIN: Income/Taxable gains reportable by grantor during lifetime, are additional non-taxable gifts to beneficiaries. Debt on death of grantor is in grantor’s estate, transfer of business assets is not. Appreciation in business assets after trust also not in estate.