HOW TO PROTECT WHAT YOU BUILT
We’re all familiar with the end-of-life preparations we make for our loved ones. Maybe we draft a Last Will and Testament, perhaps we put our assets in Trust. But what happens to a family business when the principal is no longer around?
Here are some tips to think about- and plan for- the continuity of your family business. Still got questions? We’ve got answers.
OWNERSHIP: CLARITY IS KEY
Stock and Membership Interests are considered personal property. As such, they will pass to your heirs in one of two ways: (1) under Florida’s statutory scheme or (2) in accordance with the terms of your Will or Trust. For that reason, make sure you clearly devise (or “give away”) your ownership in the company. After all, a clear line of succession is the best remedy against uncertainty.
Confusion about who inherited what Stock will certainly affect the day-to-day operations. It can also impact cash flow, in the event a bank or lender feels that ownership could be contested in a court of law. Finally, it could also cloud title to real property; for example, a conveyance may not be permissible until ownership questions are fully settled.
Always devise your Stock and Membership Interests using clear and unambiguous language. Avoid using vague phrases like “I devise all my Stock in XYZ Corp. to my oldest son”. What is “all”? Is it what you own at the time of death or at the time you wrote the Will? In addition, what happens if your oldest son predeceases you? In that event does it go to your next oldest child? And what if the next oldest child is a daughter? You get the point.
MANAGEMENT: PREPARE EARLY
It’s often the case that family businesses are run by the principal (alone). For example, they tend to serve as the president, director, and sole shareholder of the family company. This is most often done to avoid inconveniencing other family members when documents need to be signed. But this monopoly can be an issue.
It’s likely that once the principal passes, the current Bylaws (or Operating Agreement) no longer make sense. They were probably drafted as a single-member LLC Agreement or as single-shareholder Bylaws. As such, it may be difficult to elect new leaders needed continue the business. To that end, review the current agreement and make any necessary amendments for the journey ahead.
FINANCIAL ACCOUNTING: ALL IN THE OPEN
You should always address the company’s assets and liabilities- ahead of time- to help your family understand the financial picture. After all, the new beneficiaries may find themselves in different tax brackets or facing debts they were previously unaware of. It’s important to empower them with the necessary information to carry the company forward.
Proper financial accounting starts with proper record-keeping. So ensure the company’s financial footprint is accurately recorded and accessible to anybody who may one day need to take the reigns.
It’s often heart-wrenching to discuss business continuity with family members, especially young ones or those uninvolved with the day-to-day business. Nevertheless, proper planning can help you protect what you worked so hard to build.
Got questions?