Q. When should my business seek legal counsel?
A. The time to get competent counsel is before you need it.
An Ounce of Prevention
Your business is sued. You receive notice of an impending audit from the Internal Revenue Service. You need legal counsel, and you need it fast! This scenario is ugly, but not uncommon. Often situations that devolve into serious problems for business owners could have been avoided had legal counsel been sought as part of the overall planning for the business or a particular transaction.
The preemptive use of business or tax lawyers is often vastly less expensive than hiring attorneys once a situation has reached the “crisis” stage.
4 AREAS YOUR BUSINESS NEEDS LEGAL PRE-PLANNING
1. Forming Your Business Entity
Poor entity formation planning is like building your company on a flawed foundation. A number of very practical issues need to be addressed up-front when starting any business:
What entity type? You need to know whether a limited liability company, corporation, or some limited partnership form will maximize efficiency and mitigate risk.
Who has the final say if owners disagree? Addressing a number of operational issues in the operating agreements of LLC’s or partnerships or in the by-laws of a corporation goes a long way toward better harmony amongst owners once the “honeymoon” phase is over.
How can a business co-owner sell an interest and exit the business? Whether other owners and/or the company itself will have preemptive rights to buy out a parting owner, and at what price, should be addressed in the entity’s governing documents.
2. Taking On Additional Investors
Admitting new investors as owners can introduce significant issues. Making sure that a new investor has had a chance to make an accurate and full review of the financial and operational condition of your business and then having this fact correctly documented by legal counsel through a subscription agreement and other corollary documents is essential. Absent this diligence, it is very possible that a future lawsuit against your business is in the works.
3. Unexpected Tragedies
Planning for the untimely death or disability of a co-owner of a business is important. When an owner dies or becomes disabled, the future success of a business may depend upon not having to deal with that owner’s power of attorney holder (in the event of disability) or personal representative or ultimate heirs (in the event of death).
“Buy-Sell” agreements setting forth when an owner’s interest is automatically repurchased by other owners or the business is usually the best approach in dealing with this problem.
4. Business Succession
Advance planning for this inevitability is almost always cheaper than leaving problems for lawyers to clean up later. Make sure the business is not unduly tied up in the probate process and make effective tax planning decisions.
The probate process can be avoided by planning for the ownership interests of a business to be owned by, or transfer-on– death, to a trust established by the owner during his or her life. Estate planning documents that set forth how a trustee of a trust will manage the business interest, along with a methodology to get the business interest sold or transferred to heirs at some future point, are critical.
Estate tax laws have been overhauled such that an individual who gave no prior taxable gifts during lifetime can leave approximately $5.34 million worth of assets estate tax free at death (in 2014). A married couple therefore can effectively leave $10.68 million in assets to their heirs collectively. Most closely held businesses will fall under these values.
While methods exist for paying estate taxes over a period of years where closely held business interests compose a significant part of the estate, our experience is that avoiding long-term agreements with the Internal Revenue Service for the payment of taxes is generally preferable. With insufficient lifetime planning, certain businesses that were supposed to be passed down to successors end up in a forced sale position.