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Time for a Business Checkup
By: Jane-Marie Schaeffer, Esq.
While gathering and reviewing your financial information for tax time, it is also a good time to review your business plan to make sure your legal and planning documents are in order. For example, now is a good time to update your corporate minutes and document business decisions you have made in the past year. It is also a good time to review your planning documents, and update your business succession plan. The following “business checkup” will walk you through that process to make sure everything is up to date.
Business Formation and Choice of Entity
1. Do you have the necessary documents for your choice of entity?
i. Limited Liability Company – Operating Agreement
ii. Corporation – Shareholder’s Agreement, Corporate By-Laws, Buy-Sell Agreement
iii. Partnership – Membership Agreement
2. Do you need to change your form of business entity? Reasons for changing your form of business entity may be growth of business, admission of new members, tax reasons.
3. Do you have the necessary liability insurance in place to cover your business? For example, insurance that provides disability and death benefits.
Ongoing Operation of Business
Whether you are a corporation, a partnership or a limited liability company, it is important to follow formal procedures for your business decisions and to have annual meetings to conduct and ratify business transactions. This is important not just from a business perspective, but also from a legal perspective. For example, the added protection from liability one receives as a member of a limited liability company is only available if one follows all the formalities of having a separate entity. Too often a litigant is allowed to “pierce the corporate veil” and obtain a judgment against a member of a limited liability company if the member does not follow formal procedures. Similarly, cases claiming a discounted valuation for estate and gift tax purposes have been lost when the taxpayer did not follow formal procedures for their limited partnership or limited liability company. The following should be completed each year:
1. Annual Meeting
2. Notice to Shareholders/Partners/Members of Annual Meeting
3. Waiver of Notice of Annual Meeting
4. Minutes of Annual Meeting
5. Corporate or Member Resolution
Have you designated someone to make business decisions for you in the event you are unable to? Did you know that you can execute a Power of Attorney that designates someone to act on your behalf for business decisions alone, separate and apart from your Power of Attorney that relates to your personal affairs? A Business Power of Attorney is an important document, and essential for a sole proprietorship, or other small business, that may not have the necessary plans in place to ensure continued operation of the business when the principal business owner is unavailable.
Business Succession
Do you have the necessary plans in place to ensure the succession of your business upon your death, disability or retirement? The following are a series of questions to ask yourself, and discuss with your attorney, who can incorporate your answers into the necessary planning documents for your business.
1. What do you want to happen upon your death? Do you want the surviving members of the business to be able to buy out your share? Do you want to require the company to redeem your shares? Do you want your heirs to have the option to continue in the business?
2. What if you become disabled? Do you want to protect your right to income? What if your business partner wants to sell his/her share of the business? How do you want to handle your ownership in the business if the disability becomes permanent?
3. What if you want to sell your share of the business to a third party? Do you want the other members of the company to have the right of first refusal?
4. What will the terms be for the “right of first refusal?”
5. How do you want to handle a dispute over the management of the business? Do you want the right to compel the company to purchase your interest in the company if such a dispute arises?
6. How do you want to handle giving an incentive to a key employee for his/her continuing contribution to the success of the business? Do you want to give an interest in the business to the key employee?
7. How will the purchase or redemption of a member’s interest be funded? If life insurance is used, then who will own the life insurance and how will the buy-sell agreement be structured?
8. How will the company fund a disabled member’s compensation? If disability insurance is used, then who will own the insurance policy and how will the buysell agreement be structured?
9. Do you want to be granted a “put” right, which will compel the company to purchase your interest if a dispute over management arises and the partnership is no longer viable? Hopefully this brief checklist has prompted you to review your business planning documents and make sure that they are brought current and in line with your current situation.
If you have any questions about the matters discussed in this e-letter, please contact Louis W. Pierro, Jane-Marie Schaeffer or Lynn M. Coles at (518) 459-2100. Prior Tax Planning E-Letters may be accessed at
www.pierrolaw.com.*The article would like to express appreciation to Lynn M. Coles, Esq. for her input with the Business Succession Planning checklist.