Hi Lee Phillips here
and I want to talk to you about what i'm going to call
business
succession planning
what does a little business do when its owner dies
well
95% percent of the time the business fails
and the number of businesses that survive
the death of the founder, the owner, original owner are just tiny
so if you want the business to survive at all
you're going to have to do some planning
1) who's going to take over when this guy dies
the original owner dies
could be the sons or the daughters or the wife
or maybe Joe or who you know a major employee
but that's something that has got to be considered
and there actually needs to be something at least talked about
as to how it's going to work
then you've got to figure out how is it going to work
from a legal standpoint
if dad owns all of the stock
all the membership interests in the LLC
then
how do we get that to the sons or the new guy, Joe
or whoever is going to start to manage and take over this thing
now mom's going to want it if dad dies
because that's frankly the major value of her estate probably
and yet there isn't any value in it now because dad's gone
so legally we need to make the transfer of ownership
and we need to make it easy
the only way you can do that
well that isn't true
but the only way you can do it that should be done
pretty effectively is
to have the stock in the company
now if this is a Subchapter S stock
then you're going to have to have a trust that is Subchapter S qualified and
that trust is going to have to own the stock before dad dies
it has to be Subchapter S qualified in the trust
and there are six or seven points that have to be there
basically the IRS is concerned as to who gets the money
Sub-chapter S is a pass-through so they want to know where it's going
and if it goes into a black hole trust
then we got a problem
so the trust has to be written for Subchapter S stock
that trust owns the stock then when dad dies
we can make the transfer easy because the owner didn't die--
it's the standard probate problem
but if dad's trust or if dad's business gets caught up in probate for five years
or three years or the average year and a half
then it's up in the air and we don't know what to do with it
we can't give Joe an interest in it right away so that he'll take over and start to manage it
so mom can continue to get an income out of it
so the stock or the membership interest
and it doesn't matter whether it's stock or membership interest
if it's taxed as Subchapter S then we need the Subchapter S trust
if it's taxed as a partnership or a sole proprietorship
then that's not particularly of interest to us
in that it doesn't have to have a specially written trust
any trust will do, so to speak
and so the ownership, the membership interests or the stock
needs to be held in a trust
now it is possible to do this succession planning actually in the
articles
or the operating agreement or the bylaws
you can write in the bylaws, in the operating agreement
that when dad dies
his ownership is divided up this way
and that will avoid probate
and it will allow the company to transfer ownership
to transfer that
usually that's not done
it's i'm going to say a little cleaner to do it in the trust
but it can be done in the operating agreements or the bylaws
and the succession can be named
and the ownership can be transferred
in those documents
but we get into some issues with that because dad's dead
and we have
a thing that needs to be done that dad can't really do
but it's planned so
i'd prefer to see it in the trust format moving forward
rather than the actual operating agreement or the actual bylaws
but it could be done that way
so it's critical that you think who can do this
maybe we need to have two people on the signature card at the bank account
and two people who can manage the merchant accounts
and all that sort of stuff
mom could be put on
the fact that mom signs the signature card at the bank with dad
and I'm talking about little family companies here okay
the fact that mom is on that signature account doesn't give her any liability particularly
except to the IRS
in the liabilities of the company
the fact that somebody can deal with a merchant account
that doesn't expand the liability of that individual really
because they're not officer/director/owner of the company
they're just an employee and about the only one that can really go get just an employee
is the IRS
if you sign the checking account you're liable to the IRS for unpaid taxes
so think about it
what happens when dad has his heart attack tomorrow
and he's not here
how does the business move forward
and I understand you're worried about just operating the business today
but you need to think about operating it tomorrow too
when dad's not there or the owner isn't there
and if you're the primary employee of this company
not related
you need to think about that too
and that needs to be a question that needs to be asked
it's a fair question to ask
so succession planning
in a business is pretty critical
if you want that business to continue on
after dad/the owner/the founder dies
and even larger businesses with a thousand employees
the chance of that business surviving the death of the owner for five years isn't good
it will wind down
I call the guy the gyroscope
he's the one that created it
he's the one that thinks it through
and who's going to create
who's going to think it through
after that guy's gone
that's something you need to think about even in a bigger business
this is Lee Phillips now don't forget to subscribe
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