Family Business Planning

1. What is Family Business Planning?

a. Successfully passing businesses to the next generation or other chosen successors.

b. Balancing tax and cash flow considerations within the family and maintaining family harmony.

c. Both are equally important. A wise owner is careful to consider both and not concentrate on one to the detriment of the other.

2. Who is the Client?

a. The duty of loyalty generally prevents a lawyer from representing two or more clients with conflicting interests.

b. Many lawyers represent all members of the family with business planning. The scope of the representation should be clearly expressed in an engagement agreement. Frequently, all family members will desire you represent them jointly. This can be done provided:

i. The lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client;

ii. The representation is not prohibited by law;

iii. The representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and

iv. Each affected client gives informed consent, confirmed in writing.

3. Which Objectives are Primary?

a. Income security for parents.

b. Income security for the children.

c. Perpetuation of the business and family harmony.

d. Permissibility of non-family owners.

i. In-laws

ii. Key employees

iii. Outside investors

e. Tax efficiency.

f. Stays focused and follow through - the worst plan is the unfinished plan.

4. Parents' Objectives.

a. Exit strategy:

i. Living transfers

1. Immediate

2. Gradual

ii. At death

1. Immediate

2. Gradual

b. Control:

i. Full retention

ii. Partial retention

iii. Phased surrender

1. Gifting

2. Grats

3. LLCs and LLPs

iv. Full Surrender

c. Cash flow and benefits:

i. Sales proceeds

ii. Salary

iii. Income from business assets

iv. Bonuses

v. Stock options

vi. Deferred compensation plans

vii. Health insurance

d. Equity and Family Harmony:

i. Seek perfect equality of gifts

ii. Recognize disparity based on entrepreneurial risk

iii. Life insurance

iv. Part gift/part sale

e. Tax efficiency.

5. Children's Objectives.

a. Acquisition of control.

b. Understanding entrepreneurial risks.

c. Protecting their interests.

d. Full disclosure and participation.

e. Being fair versus being equal.

f. Maintaining healthy relationship with siblings and other involved relatives.

g. Spouses and in-laws:

i. Purchase = community

ii. Gift = separate - Caveat 2339 and 2368 (Reasonable salary is important). This applies parents and descendants.

iii. Marital agreement and spousal consents to buy/sell

iv. Declarations of separate property under 2339

6. Buy/Sell Agreements.

a. Restrict the sale or transfer to unwanted third parties.

b. Void transfers to individuals or entities that would terminate S election, the status of the corporation as a professional corporation under state law, or violate franchise or dealer agreements.

c. Facilitate smooth transitions of control and/or ownership.

d. Triggering Events:

i. Divorce

ii. Disability

iii. Death

iv. Retirement

e. Provide liquidity to fund buy-outs:

i. Life insurance

ii. Optional installment pay-outs

f. Set prices in advance.

g. Security for equity.

h. Prevent delays in transfer.

i. Avoid control disputes upon death.

j. Give remaining owners certainty regarding terms of their future involvement and place in the business.

k. Identify the proper type of agreement:

i. Redemption agreement

ii. Cross-purchase agreement

iii. Wait and See

1. Business

2. Co-owners

3. Business must buy

iv. hybrid