Planning for the ownership Interest in a Closely Held Business
A small privately-owned business (a business with only a few shareholders or interest holders) is sometimes referred to as a closely-held business. The ownership is held typically by those actually involved in the business. The owners are often either family members or friends who have gone into business together. Sometimes there are interests that are held by someone who has provided funds, or an interest that has been given or “bonused” to a key employee.
Most of the time, when the business starts, the owners are the operators or “doers” of all of the work in the business. They maybe can afford to pay themselves, but they can’t afford to make any distributions to someone who is not actively involved in the business. Over time, if the business is successful, they may make more money and have more assets and employees, but they typically don’t go back and contemplate what will happen when one of them is not there anymore, regardless of the reason.
If you have an interest in a closely-held business, estate planning can be more involved than for someone who has does not have such an interest. We find that often owners of these types of businesses have not planned for events such as the disability of an owner, the death of an owner, the retirement of an owner, or a disagreement that is so great they cannot work together anymore.
Let’s say that three friends start a machine shop business. The set it up, establish a corporation or Limited Liability Company and each of them owns one-third (1/3). What are the things that they should contemplate?
1. An exit strategy for retirement.
2. How the interests should be owned so that at the death of any of them, will they be able to avoid the need for probate administration regarding the corporate or LLC interest of the interest owner who has died?
3. What will need to be done in the event that one of them becomes disabled.
4. What will happen in the event one of them decides to leave and not participate in the business anymore.
5. What will happen in the event of the death of one of them?
There are many planning techniques to deal with these issues. It is much easier when everyone gets along and the business is growing to put a plan in place that is fair and won’t cause hard feelings in the event one of these things happens without time to plan.
A shareholder’s agreement or an Operating Agreement that triggers a Buy/Sell provision in the event of these types of issues, can address how valuation is to be determined (usually the biggest problem) and how payment is to be made (usually the second biggest problem). Having Life Insurance or Disability Insurance also may be beneficial. If the desire is for the remaining interest holders to continue the business, not having these issues addressing these issues is a big mistake.
Contact our Wichita office at 316-729-0100 for assistance with your business planning needs.