LGBT business owners should use estate plans to protect their ownership interests in companies, as I discussed in Part I of Business Success Planning for LGBT Business Owners. These business succession arrangements are crucial to ensuring the successful transfer of your company or to properly provide for your life partner, yet few business owners have planned for the eventual transfer of their business interests.
One of the critical succession planning documents to have in place is a buy-sell agreement-a legally binding contract that can be used with all entity types. It stipulates that upon a triggering event, such as the death, disability, retirement or withdrawal of a principal, his or her share of the business must be sold to the remaining partners or shareholders, or to the business itself. The remaining partners, shareholders, or the business agrees to purchase the portion of the business owned by the deceased, retired, disabled or withdrawing principal.
Funding a buy-sell agreement is just as important, if not more, than drafting the agreement itself. Too often business owners start the process of drafting a buy-sell agreement but fail to plan for how to fund the business-interest purchase when a triggering event occurs. The following are three common ways to fund a buy-sell agreement:
➢ Pay cash: Requires large sums of liquid assets that may not be readily available at the time of an unforeseen event. A remaining owner may have to liquidate valuable personal or business assets below market value in order to raise cash quickly.
➢ Borrow the money: The loss of an owner or key person may impair the credit rating of the business and its ability to borrow. Moreover, the principal plus interest must be repaid which can put a tremendous strain on the business budget.
➢ Purchase life insurance: For most businesses, this is the most favorable option because money is available from the policy cash values or death benefit for the purchase of the business interests.
Advantages of buy-sell agreements to the owner and his or her heirs:
➢ Helps avoid family disagreements regarding the value of a business, as well as the legal and emotional costs of a valuation dispute.
➢ Specified proceeds can provide the decedent's estate with funds to help meet estate obligations that can reduce or eliminate the need to liquidate other estate assets.
➢ Helps establish the value of the business for federal estate tax purposes and may, therefore, avoid costly and aggravating IRS litigation.
➢ The heirs' economic futures will no longer be tied to the fate of the business and they will be free from worry about the financial success of the business
Advantages of buy-sell agreements to the business and/or surviving principals:
➢ Ensures a smooth and complete transition of management and consolidation of business control in the hands of the agreed-upon group.
➢ The business and/or surviving principal(s) are assured of the cash necessary to purchase the decedent's interest.
➢ Prevents potential impairment of the business' credit line.
➢ A properly drawn buy-sell agreement can protect a corporation's subchapter S status by avoiding inadvertent conversion to C corporation status.
➢ Protects the business against inactive, unqualified, and/or potentially dissident heirs in the management of the business.
You put maximum effort into establishing and running your business. But are you taking the rights steps to make sure your business survives your retirement, disability, or death of an owner or key employee? For the protection of you, your family and your business, it makes sense to reduce the risk of loss at the death, retirement or disability of a key person and business succession planning provides that protection.
Angela Giampolo is a certified LGBT business owner of Giampolo Law Group and Angle Government Solutions, both based in the Philadelphia area. Read for Part I of her column on succession planning here.
