Business Planning & Entity Formation
The wealth management process coordinates the management of your business throughout its life cycle with risk management, distributions to the owners, and succession planning.
Operating planning focuses on critical components of managing a business in the various stages of its life cycle. Ultimately, many variables impact the financial performance of a business, and only some of these variables are in your control. Common and controllable management issues include sales and marketing, cost/benefits analysis, controls, human resources, tax issues, asset management, and product development.
Starting and running a business carries its own set of risk exposures. The type of business entity you chose can have a huge impact on how safe your personal and business assets are from risk. The state you choose to do business in is another factor. Additional factors that expose you to risk include how you manage your business, your human resources, and your taxes. Business risk management identifies your options for handling these risks.
Executive compensation forces on both cash and non-cash approaches. The size and structure of the business significantly influences your compensation systems. Large businesses tend to provide owners with sophisticated and sometimes complex compensation formulas. Small business tend to adopt a more straightforward compensation approach. Examples of compensation include insurance benefits, qualified retirement plans, stock options, personal performance initiatives, and other tax-advantaged non qualified plans.
Succession planning focuses on the transition of a business from an existing owner to a new owner. While key factors vary extensively with business type and industry, there are some factors common to all business transitions, including the creation of a sellable business and the formulation of specific transition mechanics at time of sale. Additional succession planning issues positioning a business for sale, determining valuation and terms, grooming senior management and creating strategic alliances.
A Comprehensive Estate Plan often includes forming various types of necessary entities. The following is a brief list of the types of entities we often assist our clients in creating, while assisting them in building a solid estate plan:
Family Limited Partnership (FLP)
Family Limited Partnerships protect personal and business assets from predatory creditors and litigants. They can also provide estate tax savings, maximum control of assets and income tax savings within the family.
Limited Liability Company (LLC)
LLCs protect personal and business assets from predatory creditors and litigants and can provide estate tax savings, maximum control of assets and income tax savings within the family. One major difference between an FLP and an LLC is that there is no need for a general partner with an LLC, while an individual General Partner would be personally liable for FLP debts. An LLC's members can actively participate in management without jeopardizing limited liability.
A corporation is an entity separate and apart from its owners, created by state law and is given its own taxpayer ID number by the IRS. Corporations minimize personal liability. Stock of the corporations needs to be protected.
Choosing an Entity for Your Business
Whether you have been in business for years or you are launching a start-up, choosing or changing your business's entity is an important part of it financial and overall future.
A business's entity determines the rules that govern its formation, operating, taxation, and dissolution. Its entity also establishes the degree to which the business and its investors are liable for the acts of an agent of the business. The entity you choose for your business will affect future financial business decisions, like the need for additional insurance to protect yourself against liability or the decision to sell ownership interests.
When choosing an entity for your business, you will want to consider the attributes of each type of entity and which best fits your vision for the business.
There are seven primary entity attributes:
- Formalities of existence
There are certain requirements and procedures involved in forming and maintaining the entity. The few formalities of existence, the simpler and less expensive the entity. So, if you want to avoid spending a lot of money forming or maintaining your business, consider an entity that has few formalities of existence.
- Limited Liability
An entity offers limited liability if an owner can lose nothing more than his or her investment. In other words, the owner's personal assets are insulated and cannot be used to satisfy the entity's liabilities (debts). If you do not wish to put all of your personal assets at risk, think about an entity that offers limited liability.
- Pass-through taxation
In a pass-through entity, only the owners are taxed, not the entity. A separate taxpaying entity, on the other hand, may be taxed on the same profits twice; the entity is taxed on its profits, and then the shareholders are taxed when (or if) these profits are distributed to them as dividends. This is known as double taxation, and its existence is the main reason business owners choose a pass-through entity. If you plan to have the profits of the business distributed as soon as they are earned, of if you want a business that will permit you to deduct business losses from your personal income, consider a pass-through entity.
- Centralized management
An entity has centralized management if a person or a relatively small group of people is responsible for management decisions. If you only plan to give a few people decision-making power, which usually results in quick decision, choose an entity with centralized management.
- Flexibility in sharing profits and control
Some entities are more flexible than others in sharing profits and control with their owners. Depending on the flexibility, an entity can sell its stock to any willing buyer, issue classes of stock with differing rights regarding the distribution of corporate profits to shareholders, or issue stock with different voting rights. If you want to have control over how profits are distributed and who has control over the corporation, you should choose an entity that allows you this control.
- Community of life
Some entities can exist forever. This is called continuity of life. An entity does not possess this attribute if the death, bankruptcy, retirement, insanity, or resignation of an owner can cause it to end (dissolve). Continuation of the business can be planned for, so while this isn't necessarily a real problem, it is something you should be aware of and consider.
- Free transferability of interests
You should consider the ease with which ownership interests may be transferred. Free transferability of interests exists when owners are permitted to sell their ownership interests to others without restriction.