 Michigan Business Law
We assist clients starting a business in choosing which business
entity (or entities) is best for their situation, not only from a tax
perspective, but also from asset protection and estate planning
perspectives. We also help business owners with the legal issues
involved in transferring a business, whether through a sale or exchange
or to the next generation of a family business. For family business
owners, we also address the issues of coordinating the business and
family estate plans and meeting the challenges of estate equalization
while ensuring
family harmony and the ongoing health of the business.
Choosing a Business Entity
Business ownership can be a complicated process, filled with decisions for everything from choosing what types and shares of stock to issue for a corporation to choosing a business name and
filing it with the State. All of these decisions must be made against the backdrop of both legal and practical considerations.
Choosing the business entity, or legal structure, can be complex. In addition to the legal aspects, there are practical considerations. Also, different filing and regulatory obligations
accompany almost every form of business organization. We're here to help clients sort out all of these considerations, so they can get on with the business of running their business -- and
making a profit!
Helpful Information from the Michigan Department of Energy, Labor & Economic Growth
The Michigan DELG is a good online resource for Michigan entrepreneurs and business owners. Follow the links below for more information:
Estate Planning for Business Owners
It would be an understatement to say that family businesses are the backbone of the American economy. Some 90 percent of all businesses in this country are either family-owned or
family-controlled. They come in all shapes, sizes and colors, representing all sectors of our economy. From agriculture to services, technology and manufacturing, family businesses generate an
estimated one-half of the U.S. Gross National Product and pay half of all wages earned in this country.
Not all family businesses are traditional small businesses either. In fact, about one-third of all businesses included in the Fortune 500 are family businesses. But not all of the family
business statistics are rosy.
Family businesses tend not to outlive their founders. At any given moment, 40 percent of family businesses are in the process of transferring their ownership. Unfortunately, two-thirds of
all initial transfers fail. Of the one-third that survives an initial transfer, only one-half will survive a second transfer.
Why Family Businesses Do Not Survive
Why such a dismal success rate? The reasons are as varied and unique as the businesses and business owners themselves. Nevertheless, many of the failed transfers can be traced to three
causes: people, taxes and cash.
Family Business Owners and Estate Planning for the Family
The family element in every family business can mean the difference between its success or failure during the transfer process. The retirement, disability or death of the business owner are
all common events that can trigger a business transfer.
Tough questions must be asked and answered. Otherwise, a business that took decades to build can be destroyed overnight.
For example, who will run the business after you? Will it be your spouse, one of your children or a non-family member key employee? If your spouse will not run the business, will he or she
still be financially dependent on it ... or can you make arrangements to ensure they are financially independent of it?
What arrangements have you made for the inheritance of your children who are not active in the business? Have you in-law proofed your estate?
Thinking ahead to the second-generation transfer of your business, what provisions have you made to encourage thrift and industry among your grandchildren?
Estate Tax Uncertainty
The only certainty about the federal estate is its uncertainty with each change in Congress and the White House. Additionally, many states now impose their own estate taxes, independent of
any federal estate taxes.
Accordingly, careful monitoring of the economic, political and legal climate is required. Why? Without proper estate-liquidity planning, your family may have to sell the business just to
meet an estate tax cash call.
Estimate the Estate Tax Liability of Your Family Business with our Estate Tax Calculator
Knowing potential estate tax liability for your family-owned business is a great place to start your business succession plan. Use
our estate tax calculator to estimate the estate tax liability for your family business. (Enter the estimated value of your business
ownership interest in the field for stocks.)
Click here to use the Estate Tax Calculator
Coordinating Financial and Estate Plans
If your financial and estate plans are not carefully coordinated, there may not be enough cash to fund your objectives. An appropriately-funded estate plan can meet all of your
people-planning objectives and provide liquidity for estate taxes (and business debts). Life insurance, owned in the proper amount, type and manner, may be effectively used to fund such money
matters.
The Business Buy-Sell Agreement (BSA)
A BSA is a lifetime contract providing for the transfer of a business interest upon the occurrence of one or more triggering events as defined in the contract itself. For example, common
triggering events include the retirement, disability or death of the business owner. An interest in any form of business entity can be transferred under a BSA, to include a corporation, a
partnership or a limited liability company. Also, a BSA is effective whether the business has one owner or multiple owners. As a contract, a BSA is binding on third parties such as the estate
representatives and heirs of the business owner. This feature can be invaluable when the business owner wants to ensure a smooth transition of complete control and ownership to the party that
will keep the business going. Subject to certain Family Attribution Rules under Internal Revenue Code § 318, a BSA can help establish a value for the business that is binding on the IRS for
federal estate tax purposes as provided under Internal Revenue Code § 2703.
Entity Buy-Sell, Cross-Purchase Buy-Sell and Wait-and-See Buy-Sell Agreements
A BSA is commonly structured in one of three general formats: An Entity BSA, a Cross-Purchase BSA or a Wait-And-See BSA. Under an Entity BSA, the business entity itself agrees to purchase
the interest of a business owner. Conversely, under a Cross-Purchase BSA, the business owners agree to purchase one another’s interests. The Wait-And-See BSA gives the entity a first option to
purchase the interest before the remaining business owner(s).
In addition to these three general formats, a One-Way BSA may be used when there is one business owner and the purchaser is a third party. The selection of the appropriate BSA format is
critical for a variety of tax and non-tax reasons beyond the scope of this discussion. However, no BSA is complete without a proper funding plan. Like a beautiful automobile without fuel in
the tank, a BSA without cash to fund the purchase is going nowhere.
Funding a Buy-Sell Agreement
Some common options to fund the purchase obligation under a BSA include the use of personal funds, creating a sinking fund in the business itself, borrowing funds, installment payments and
insurance. Of these options, only the insured option can guarantee complete financing of the purchase from the beginning. Accordingly, a proper BSA will include both disability buy-out
insurance and life insurance. Since the health of the business owner determines their insurability, any delay in acquiring appropriate coverage could be fatal to the success of the BSA and,
with it, the survival of the business itself.
Follow the link below to Business Owner Blues for an easy-to-understand presentation about business succession strategies. Feel free to use the integrated functions to print any
page, bookmark it to return later, or forward a copy to your friends, family members or financial advisor.
 Business Owner Blues
Being a business owner today is both rewarding and challenging, especially if your business is a family business. For business owners facing the unique challenge of transferring ownership of
the family business upon retirement, disability or death, a properly funded Buy-Sell Agreement may be the key to survival.
Click here to learn more about business succession strategies. |
