Succession Planning for the Small Business Owner
80 to 90 percent of businesses in the United States are small, family owned businesses. These small businesses account for 49 percent of the gross national product and employ 59 percent of the workforce in the United States. When advising these small businesses regarding choice of entity, the professional adviser must consider and balance the following goals of the small business owner:
- liability protection;
- maintenance of control over the operation and assets of the business;
- minimization of income and other related taxes;
- optimization of valuation discounts for transfer tax purposes.
Additionally, planning for the death or incapacity of the business owner is critical to the growth, value, and longevity of the business.
Non-Tax Related Considerations in Choice of Entity
When forming a business structure, an analysis of the non-tax related issues should be done separately from the analysis of tax related issues. The check-the-box regulations greatly expanded the business owner’s options regarding choice of business entity and, as a consequence, have increased the importance of analyzing non-tax related issues.
Benefits of a Limited Liability Shield.
Naturally, once a business owner hires employees or takes on a partner, the business owner becomes concerned about protecting his personal assets from the liabilities of his business. Almost every business owner will benefit from shielding his personal assets from the liabilities of the business via the operation of the business within a business entity that provides, via statute, such protection. The only business owner who may not benefit greatly from a limited liability shield is the sole proprietor who does not have employees. This follows because a sole proprietor without employees is exposed to individual liability for his own personal torts or professional malpractice, even if such actions are done on behalf of or in the scope of his duties as the business owner.
Transferability of Interests.
While most entrepreneurs are familiar with the veil of protection offered by the corporate form, lesser known and understood issues involving the transferability of business interest may be just as important. In addition to shareholder agreements, partnership agreements, and limited liability company regulations, state and federal laws govern the
transferability of business interests. The choice of business entity impacts upon the transfer of business interests in the event of a stakeholderís disability, death, divorce, and exit from the business. While each form of business entity manages these issues in a unique way, the governing documents of any business entity should address the following transferability of interest issues:
- Who is a permissible successor stakeholder in the event of a death, incapacity, divorce, or exit of an interest holder?
- How should a stakeholder’s interest be valued in the event a stakeholder wants to sell his or her interest or in the event the stakeholder dies, becomes divorced, is disabled, or is separated from his or her employment with the business?
In addition to carefully crafting the governing documents of the business entity relating to the transferability of business interests, the well advised business owner will consider the state and federal laws governing the transferability of business interests as those laws relate to each business entity. For example, if a stakeholder becomes the target of a judgment creditor, the choice of business entity will affect whether the judgment creditor may gain control over such stakeholder’s interest or be limited to an income interest in the stakeholder’s interest in the business.
Another important non-tax issue to resolve when selecting a business form relates to the management structure of the business form. Key considerations with regard to the management structure of a business include:
- whether control of the business will be tied to equity interests;
- whether control of the business will be centralized or diffused; and
- how control of the business is transferred.
Business Entities in Texas
Business entities in Texas take the following forms: