The Vital Role of Insurance In Business Succession Planning
Why Business Succession Planning?
Business Succession Planning identities the successor(s) of the business and locks out unwanted owners or suitors. Business Succession Planning protects the beneficiaries’ interest value in the business. It also protects the business from an unwanted spouse or other relatives. The business succession plan also prepares the firm or business for the departure of an owner due to retirement, disability or death.
Questions To Ask Business Owners
Here are ten thought provoking questions that Financial Services Professionals can ask business owners. They are designed to get to the heart of their needs…quickly!
- Does your business account for more than half of your net worth?
- Does the value of your estate currently exceed the applicable exclusion amount i.e. the amount sheltered from federal estate taxes?
- Are family members currently active in the business?
- Would you like your business to remain in the family and managed by family members?
- You currently have family members working in the business…Do they have the management experience necessary to succeed?
- Do you have other family members that are not involved in the business that will share in your estate?
- Is it your intent to have your heirs inherit equal shares of your estate?
- Does the thought of your assets shrinking due to estate taxes and capital gains taxes concern you?
- Would you like to provide a source of funds, other than the business, for paying taxes that may be due at your death?
- Would you like another source of funds, other than the business, to provide for your heirs who are not active in the business?
Gain Working Knowledge Of Business Succession Planning
To gain a working knowledge of Business Succession Planning, please review the following case study on Rose Stone and Roy Robinson; owners of the computer services company R&R that supplies bio-metrics devices and application software to companies, airline industry and Homeland defense. Click on the topics links to walk thru this case study. You can also click on the appropriate section you wish to review at any time.
The Vital Role of Insurance In Business Succession Planning
Rose Stone and Roy Robinson
Rose Stone and Roy Robinson own a computer services company (R&R) that supplies bio-metrics devices and application software to companies, airline industry and Homeland defense. R&R started out in Rose’s basement as this is where she would go to relax and work on ideas. Rose would then take the idea to Charlie Lee and Sameer Gupta (Computer Engineers) who would either tear the idea apart or build it into a practical computer application. Six and a half years ago, Rose and Roy enter a biometric project in the national competition for a major computer convention. They won! The publicity attracted the interested of a midwest company with a major contract with Homeland Defense. To their surprise, the company offered them a nice sum of money for all rights and material to this biometric application. Six months later, Roy and Rose started their own company i.e. R&R. They hired Charlie and Sameer as full time employees.
Business Profile of R & R LLC
After several intense meetings with the Certified Public Accountant and their business attorney, Rose and Roy agreed on starting the business as a Limited Liability Company. Rose comments were that the Limited Liability Company–LLC is a great compromise between a partnership and a Corporation. It combines the ‘pass-through’ treatment of a partnership with the limited liability umbrella carried by corporate shareholders in the C Corporations and S Corporation.
LLCs can be Member-Managed or Manager-Managed
If the LLC is Member- Managed, each member make decisions on behalf of the company, not just designated partners or senior members. A decision made by a member to enter into a contract or loan agreement usually must be approved by a majority of the members. If the LLC is Manager-Managed, the manager acts as the agent for the LLC and the members no longer have agency to make decisions on behalf of the business. R&R LLC is Manager-Managed by Rose Stone and Roy Robinson. This eliminates questions of authority between members and managers, and the potential that the wrong persons may authorize transactions.
Limited Liability Company –LLC
Rose and Roy considered setting other business structures. The Limited Liability Company was chosen over the Limited Partnership for three reasons:
- Personal Limited Liability of Members (Roy and Rose)
- No double taxation as it is in a C Corporation.
- Under IRS "check-the-box" rules, a Limited Liability Company may choose whether to be taxed like a partnership or a corporation. Note: Rose and the co-owners like the idea of the income beginning taxed proportionately to each of the members who report it on their personal tax returns. Same idea with expenses.
Types Of Business Structures
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Type of Company
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How Easy Is It To Raise Money?
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Who Manages
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Operation is:
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Liability
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Sole Proprietorship
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SP
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Difficult
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The Owner
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Simple
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Unlimited
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General Partnership
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GP
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Difficult
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Partners
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Simple
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Partners
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Joint Venture
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JV
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Difficult
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Partners
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Simple
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Partners
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Limited Partnership
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LP
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Difficult
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Partners
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Medium
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Partners
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|
Limited Liability Partnership
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LLP
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Possible
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Members
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Medium
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No
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Limited Liability Company
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LLC
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Possible
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Members
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Medium
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No
|
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Corporations
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C
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Stock
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The Board
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Difficult
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No
|
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S-Corporations
|
S
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Stock
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The Board
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Difficult
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No
|
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Non-Profit Corporations
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NPC
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Stock or Membership
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Members or Trustees
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Difficult
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No
|
|
Professional Corporations
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PC
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Stock/Licensed Professionals
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Board/Licensed Professionals
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Difficult
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Varies by State
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Jim Robinson posted on Friday, January 09, 2009
Posted in: Business Planning
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