Business Planning

Incorporating a business may be done through various entities such as a Sub Chapter S Corporation, or a Limited Liability Company. Why should a business incorporate?

Protection of personal assets. Safeguarding personal assets against the claims of creditors and lawsuits. Sole proprietors and general partners in a partnership are personally and jointly responsible for all the liabilities of a business such as loans, accounts payable, and legal judgements. In a corporation, however, stockholders, directors and officers typically are not liable for their company's debts and obligations. They are limited in liability to the amount they have invested in the corporation (eg: If $100 in stock was purchased, no more than $100 can be lost). Corporations and Limited Liability Companies (LLCs) may hold personal assets like houses, cars or boats. If one is personally involved in a lawsuit or bankruptcy, these assets may be protected. A creditor of the owner of a corporation or LLC cannot seize the assets of the company; however, they can seize their ownership shares in the corporation, as that is considered a personal asset.

Transferable ownership. Ownership in a corporation or Limited Liability Company is easily transferable to others, either in whole or in part. Some states' laws are particularly attractive to this end.

Retirement funds. Retirement funds and qualified retirements plans, such as a 401(k), may be established more easily. Key man insurance is life insurance purchased by the company on the life of an owner, employee or employees whose loss would have adverse effects on the company.

Insuring against the loss or short-term incapacity of key employees is a cost effective means of protecting your business.

Running a successful business you know only too well that company performance can be significantly influenced by the important contributions of a small number of "key" individuals. These "key" contributors could include your fellow directors or business partners as well as members of your staff. The unexpected death or long-term illness of any of these people could ultimately threaten your company's profits or, even worse, put at risk the long term future of your business. A family business should have a buy-sell agreement in place that specifies terms of ownership and price of transferred shares between family members in the event one of them retires, leaves the business, becomes disabled or dies. Of course, the lower the specified share price, the lower the estate and gift tax value of the shares. The specific mechanism for setting the price of the shares in the agreement has been a subject of controversy for many decades.

Regardless of your method of planning, you have worked too hard to build up your business to have it lose value or fall apart when you can no longer run the business. There are too many business owners that simply fail to do any business succession planning and ultimately give the U.S. Government more in taxes. The time is now to think about tomorrow.