Business Planning

3 Ways a Lack of Estate Planning Can Cripple Your Company

When running a business, it’s easy to give estate planning less priority than other matters. After all, if you’re facing challenges meeting next month’s payroll or your growth path over the immediate term,  concerns over your potential incapacity or death can seem far less pressing. 

But the reality is considering what would happen to your business in the event of your incapacity or when you die is one of the most valuable things you can do for your business when it’s done right. Though estate planning and business planning may seem like two separate tasks, they’re actually inexorably linked. And given that your business is likely your most valuable asset, estate planning is vital not only for your company’s continued success, but also for your family’s future well being.

Without a proper estate plan, your staff, clients, and family could face dire consequences if something should happen to you. Yet these dangers can be fairly easily mitigated using a few basic planning tools.

To demonstrate, here are three potential problems your business is likely to encounter due to poor planning, along with three corresponding solutions:

Potential problem #1: If you only have a will in place, your estate—including your business assets—must go through probate when you die.

Lots of people think a will is all they need to protect their assets. But a will alone is insufficient to protect your company in the event of your death. If you only have a will, upon your incapacity or death, your family and business will be stuck in court, dealing with probate.

During probate, the court oversees your will’s administration to ensure your assets (including your business) are distributed according to your wishes. However, probate often takes months to complete and can be extremely costly for your heirs—both of which can seriously disrupt your business operations and even lead to your company’s ruin. And perhaps worst of all, probate is a public process, leaving your business affairs open to whoever wants to know what’s going on.

On top of all that, while your family and/or team may know how to run your company without you, they might be unable to access crucial assets, such as financial accounts, until probate is concluded. Moreover, even if they can access all of the needed assets, the legal fees required for them to navigate probate can quickly deplete your company’s coffers.

And this is all assuming your will isn’t disputed during probate, which is also a real possibility, especially with a highly profitable business at stake. If your heirs disagree about whom you name to control your business and/or how the business assets should be divided, a vicious court battle can ensue and drag on for years, dividing your family and crippling your company.

Solution: You can avoid probate by placing your business in a living trust. A trust is not required to go through probate, and it transfers your assets immediately upon your death. Trusts also protect your business from creditors and lawsuits, who might go after your company with you out of the picture. Plus, trusts remain totally private.

Potential problem #2: If you become incapacitated and haven’t legally named someone to manage your business assets, the court will pick someone for you.

Another issue with a will is that it only goes into effect when you die and offers no protection for your business if you’re incapacitated by accident or illness. With just a will—or no planning at all—the court will appoint a “financial guardian,” sometimes called a conservator, to assume control of the company until you return to capacity.

Whether the guardian is a family member, employee, or outside professional, it’s highly unlikely that they’ll run the business exactly how you would, and this can lead to major disruptions. Not to mention, having a court-chosen guardian managing your business  affairs can cause major conflicts and strife within both your team and family members, particularly if you’re out for a lengthy period.

 Solution: One planning tool that can prevent this is durable power of attorney. Durable power of attorney allows you to name the person you would want  to run your business if you’re ever unable to do so yourself. If you’re ever sidelined by illness or injury, this person will be granted immediate authority to handle your business affairs, such as managing payroll, signing documents, and making financial decisions.

Potential problem #3: If you name a family member to run your company after your death and don’t offer them a detailed plan, your business can be wrecked by just a few bad decisions.

There are countless horror stories of family members assuming control of multi-million-dollar family businesses and running things into the ground in just a short span of time. And if such massive fortunes can be squandered so easily, it’s highly doubtful that smaller operations like yours will fare much better.

Even if your successor doesn’t destroy the company, he or she can cause serious conflicts among your staff, clients, and family simply by managing the business radically differently than you. Given this, simply naming a successor to take the reins in your absence is not enough.

 Solution: A comprehensive business succession plan can help ensure your company doesn’t fall apart when you pass on. Beyond simply naming a successor, such plans provide stability and security by allowing you to lay out detailed instructions for how the company should be run. From specifying how ownership should be transferred and providing rules for compensation and promotions to establishing dispute resolution procedures, an effective succession plan can provide the new owner with a roadmap for your company’s continued success.

Keep Your Company Out of Court and Out of Conflict

If you haven’t taken the time to put proper estate planning in place, your business is missing one of its most essential components. Consult with us as your Family Business Lawyer®, so we can help you find the planning strategies best suited for your particular operation. Putting an effective estate plan in place can ensure the company and wealth you’ve worked so hard to build will survive—and thrive—no matter what happens.

4 Legal Landmines to Avoid When Launching a Business

The whirlwind of excitement and activity surrounding the launch of a startup can feel overwhelming. You’re so focused on managing the day-to-day logistics of getting your business up and running, you often don’t have time to focus on the bigger picture.

Because of this, it can be easy to overlook some perilous legal pitfalls that can turn your entrepreneurial dreams into a nightmare. Indeed, not having the proper legal protections in place is one of the biggest reasons startups fail. But with sound legal advice and planning, it’s fairly easy to safely sidestep these potential dangers.

Here are four of the most common legal landmines to watch out for:

1) Choosing the wrong business entity: Choosing the right legal structure for your business is crucial, not only for protecting your personal assets from liability, but also for boosting your income and saving on taxes. Whether it’s a sole proprietorship, limited liability company (LLC), or S-Corporation, each entity comes with unique advantages and disadvantages, all of which must be carefully considered before launching.

Consult with us for help choosing and setting up the business entity structure that’s best suited for your particular operation.

 2) Not having a clear founders’ agreement: In a startup’s early days, it can be tempting to skip clearly documenting each co-founder’s responsibilities, rights, decision-making power, and equity. You’re all in this together, right? But if you don’t have a thorough founders’ agreement in place from the start, you risk major legal and financial conflicts down the road.

Such agreements should be in writing and created with the guidance of lawyer who specializes in business law. And they should be in place before you begin earning revenue. Once a business starts making money, you’ll often find your co-founders’ goals aren’t as closely aligned with yours as you first thought.

3) Not having the proper employment agreements: As with a founders’ agreement, you should also have comprehensive employment contracts in place for every person who works for you—both full-time employees and independent contractors. It doesn’t matter how long you’ve known the person, you should have an agreement in writing clearly laying out the terms and conditions of employment.

Require your workers to sign these contracts to provide evidence that both parties are aware of the employment relationship, especially when it comes to classifying employees versus independent contractors. These documents should also include any non-disclosure agreements and/or non-compete agreements you need to ensure your trade secrets and clients don’t fall into the hands of your competitors.

4) Not protecting your intellectual property: Protecting your intellectual property (IP) from outsiders and competitors by securing patents, trademarks, and copyrights is essential. But don’t forget to protect your IP from insiders as well.

Make sure that all intellectual property (IP) brought into your business by its founders before startup, along with any IP created by owners, employees, and/or contractors after its launch, is owned by the company, not the individual.

The transfer of ownership rights from the individual to the company can be done using IP assignment agreements and work-for-hire clauses. We can help you draft these agreements as well as put in place other legal protections to ensure you actually own all of the work you’re paying others to create.