Posts in: March

Business Succession: When Corporate Governance and Estate Planning Converge: Are You Setup Properly?

March 28, 2017 Business planning, Corporations, Estate Planning Comments Off on Business Succession: When Corporate Governance and Estate Planning Converge: Are You Setup Properly?

You may have heard in the news recently that there’s been some fighting among the ownership team of the Los Angeles Lakers. When Dr. Jerry Buss, the majority owner, died in 2012, his ownership passed to his six children via a trust, with each child receiving an equal vote/share.

His succession plan had his daughter Jeanie take over his position as the Lakers’ governor as well as its team representative at NBA Board of Governors meetings. This last month, there’s been a fight between her and certain of her brothers that has become a power struggle filled with plenty of contention and legal fees. They appear to have settled this particular dispute but there were a lot of moving parts to their particular situation especially because of NBA rules, etc., so in that sense, what happened with the Buss family is unique.

However, what is not unique is that every business owner faces the same dilemma that Dr. Buss faced before he died – how to pass their business to their loved ones properly and effectively through corporate documents and estate planning. We have many clients who are confronted with this. With that in mind, here are a few tips and items to consider:

  1. Make Sure You Have the Right Entity and the Right Trust. There are a number of different entity structures you might have for your business and there are just as many, if not more, different type of trusts. If you aren’t properly setup, it’s going to make your business succession plan very difficult. In the case of Dr. Buss, at least he had a trust, and what turned out to be a month long dispute might very well have turned into a much longer dispute but for the trust. However, just having a trust is not the end-all be-all, rather, you need to make sure it’s the right type of trust and also that it contains the appropriate provisions for your circumstances.
  1. Have Your Corporate Documents Reviewed and Amended if Necessary. This is critical especially when you have business partners. Hopefully you have something in place currently in terms of corporate governance documents, whether it’s an operating agreement, partnership agreement, bylaws, and/or a shareholder agreement. If so, don’t assume it covers this issue and/or that is covers this issue in the best way for you based on your circumstances. The provisions you’ll want reviewed include but are not limited decision-making, ownership rights, transfer of ownership, etc.
  1. Consider A Plan To Transfer Some or All of Your Business Ownership To Your Loved Ones During Your Lifetime. You can wait until you die to have your business ownership transfer to your loved ones, or during your lifetime, you can strategically phase the transfer of ownership in your business to your loved ones over time. There are pros and cons to both approaches. With the former approach, it could increase the likelihood of estate tax liability. With the latter approach, you can be directly involved in the transfer of ownership and if handled carefully, it can decrease the likelihood of estate tax liability. This is where meeting with a professional can help you make a good decision here.
  1. Don’t forget to plan for incapacity. If your estate plan and business documents properly transfer your ownership to your loved ones, then you’re ahead of the game, but that is only half the battle. You also need to plan for incapacity. Such an event, if not properly planned for, can have a devastating effect on your business. You may recall back in 2014 another NBA owner, Donald Sterling, of the Los Angeles Clippers was ruled mentally incompetent and it affected his rights as owner of that team.

In summary, don’t own an NBA team from Los Angeles, but if you do, or if you own any other business, make sure you have a coordinated set of documents in terms of the corporate documents that govern your business and your estate plan documents, and that you’ve addressed not only death in said documents, but disability as well.

You’ve worked hard to build your business and when your intent was for the business to provide peace and stability for your family, the last thing you want is fighting and instability. If you are a business owner, please call our office so we can assist with this critical topic.

Eight Spring Cleaning Ideas for Your Business

March 14, 2017 Asset Protection, Business planning Comments Off on Eight Spring Cleaning Ideas for Your Business

Don’t ask me why, but my seven year-old daughter is obsessed with the cheesy early 1990’s goodness that is Full House.  Nick at Nite has scheduled a two-hour block of Danny Tanner, Uncle Jesse, Joey and the Tanner girls from 7-9 p.m. most weeknights, and my daughter begs to watch at least one episode every night before she goes to bed.

Because there are much worse things she could be asking to watch, we typically oblige.  As such, over the past year or two I’ve endured more than my fair share of Full House catchphrases (think: “Have mercy!” “How rude!” and “You got it dude!”).  Let’s just say that when Nick at Nite (or my daughter) moves on from Full House I won’t exactly be sad.  Anyway, in a recent episode that I’m sure probably originally aired in March 1990, the notoriously tidy and meticulously organized Danny Tanner exclaims: “I love this time of year!  First, spring cleaning – and now tax season!”

This got me thinking, while most of us do participate in spring cleaning for our homes, garages, and backyards, the concept of spring cleaning, with the feeling of renewal that it brings, is probably also a good idea in our businesses.  With that thought in mind, here are eight spring cleaning ideas to give your business a bit of a fresh start:

1)         Revisit your Business Plan.  If you’re like most small business owners, you’ve probably changed and adapted your business plan over the years to adjust to unexpected challenges and market changes – maybe to the point that you don’t feel like your original plan is even all that useful.  Instead of discarding it, you should think about taking some time to revisit it – maybe each spring – to update it based on what’s changed, and to evaluate if some changes may not have been necessary.  Going back to the basic foundation you built your business on will always be beneficial.

2)         Clean-Up Your Company Records and Documents.  Have you been maintaining your entities (LLCs, S-corps, IRA/LLCs) by completing minutes annually? Have you had any changes to the entities? Make sure your company documents are up to date. Also, what about the state? Are your state renewals up to date? If the legal foundation of the company is a mess it only gets more difficult to clean-up and address later.

3)         Think about your Long-Term Goals.  While you’re taking a look at your business plan, think about your long-term goals, both for the company and for your own professional life. You might find that what you really want is different than what it once was.  Maybe your concept of how your business should look five years down the road has completely changed.  It’s absolutely fine for your goals to change – but you have to be aware of what has changed and what you will have to do differently to get there.  If you determine that your aspirations are the same, then check in on your progress towards achieving them.  What could you be doing more or less of?  Are you gearing as many parts of your day – and your business practices – into moving in that direction, into attaining those goals?

4)         Take a Look at Staffing.  Spring is a great time to do employee evaluations and reward those who deserve it for their hard work – and trim what doesn’t seem to fit.  It’s most effective to sit down with your management team first and discuss your employees’ objectives, strengths and weaknesses.  Then, take the time with each individual employee to go over their measurable results.  Always remember to ask for employee feedback about your management style, as well as those of your managers.

5)         Spruce up your Web Presence.  In most lines of business, an up-to-date and useful website is necessary for attracting and retaining customers.  Potential customers and clients expect a smooth user experience that incorporates the latest Internet trends and styles.  If your website looks like something cobbled together in the era when we were all waiting for the dial up to connect so the AOL voice could tell us “You’ve got mail!” then customers probably won’t stick around long enough to find out how great you are.  Consider including marketing content on your website such as blog articles, white papers and videos.  In addition, everyday it becomes more important for your business to be active and engaged on social media.  Your website should include links to your social media channels, and those channels should be updated frequently with useful and (if at all possible) entertaining information.  In many cases, your online presence is the only tool new customers and clients will use learn about you, and it’s important that you make a good first impression.

6)         Lock Down your Intellectual Property.  Has your business progressed to the point where the name of your business or of a particular product or service has enough value that you want to make sure no one else can use it?  If so, you should think seriously about filing for a registered trademark.  Similarly, if you want to keep copycats from stealing online, recorded or printed content, filing for registered copyright protection may also make sense.  Finally, you should examine your policies and procedures to make sure trade secrets (like customer lists, manuals, databases, etc.) remain, you know, secret.

7)         Actually Deep Clean the Office.  Seriously, when is the last time anyone vacuumed behind that filing cabinet?!

8)         Dissolve and Shut-Down Entities You No Longer Use.  Do you have entities that no longer have business activity or assets in them? Are you paying fees to keep them open? Consider shutting them down if you have no future plans for their use. Keep in mind, that the liability protection of an entity still protects you for acts that occurred when the entity was in existence and in good standing.

Hopefully, these ideas can serve as a jumping off point for how to renew and refresh your business and take it to the next level!

Alternatives for Securing Your Loans or Investments

March 7, 2017 Asset Protection, Business planning, Law Comments Off on Alternatives for Securing Your Loans or Investments

We often advise clients who want to loan money or participate in an investment to “get adequate security” for their investment. The purpose of getting additional security for your loan is so that you have something else that you can go after if the loan goes south.

Ordinarily, if your loan is “unsecured,” it generally means that if the investment tanks, then your only remedy would be to sue the debtor and go through the potentially expensive process of litigation in hopes that you can get a judgment against the debtor, and perhaps most importantly, that the debtor will then have assets from which you can collect.

In our experience, if a debtor has defaulted on your investment, they are likely experiencing financial issues as a whole, and will unlikely have assets for you to recover from even if you prevail in your lawsuit. Moreover, a debtor having financial issues and/or without assets is a likely candidate for bankruptcy, and for those reasons, investors who are reduced to having to resort to the court system to remedy a failed investment are often just throwing good money after bad.

In general, real estate with sufficient equity to secure the investment is the best form of security for the primary reasons that real estate is immovable, and there is a well established public record for recording and determining rights and priorities to real estate.

However, if securing your investment with real estate is not an option, that does not mean your investment must be unsecured. In fact, virtually any type of property or asset can serve as collateral for an investment. Unlike real estate, the process and laws for securing your investment using “personal property” as collateral will depend on the type of property as well as the applicable state, local, and sometimes federal law that apply.   Examples of personal property that can serve as collateral for your loan include the following:

  1. Interests in Inventory, Equipment, or Fixtures – If you are lending to a business and that business has assets, those assets could likely serve as security for your loan. In general, this would require an additional “security” agreement which specifically identifies the assets that are being offered as security for the loan, which then must be “perfected” usually by filing a UCC-1 Financing Statement with the Secretary of State for the state where the business is located. This procedure is most often used by banks and other financing companies for business loans that are not secured by real estate. The benefit is, like real estate, the office of the Secretary of State serves as a central resource where anyone can access to determine the existence of liens against the assets of a business and the priority of those liens.
  1. Interests in Stock or interests in LLCs – If the debtor owns interests in his/her own corporation or LLC, the interest in the corporation or LLC could serve as security for a loan. This is most often accomplished by a “pledge” agreement whereby the debtor offers his/her interests in the corporation or LLC as collateral for the loan. One drawback for stock or LLC interests is, unlike real estate or other asset classes, there is no central resource like a recorders’ office or secretary of state for determining if there are competing or priority claims against privately held interests in businesses.   In addition, a pledge agreement doesn’t mean much if the entity itself has no assets and so adequate due diligence on the entity that is being pledged is essential.
  1. Interests in publicly traded securities and securities accounts – Interests in stocks or other securities held by a brokerage can also serve as collateral for a loan. Usually, this is achieved by having the parties to the loan enter into an agreement with a third party custodian that holds the account (sometimes called a securities intermediary) which provides that upon a default on the loan, the third party custodian will deliver the asset to the creditor without further consent by the debtor.
  1. Interests in Intellectual Property – Interests in Trademarks, Patents, Copyrights, and even Trade Secrets can serve a security for a loan, although the procedures for perfecting these interests in intellectual property will differ and it is often difficult to place a value on intellectual property for purposes of determining whether the value is adequate for the loan.
  1. Interests in Tangible Personal Property – Virtually any item of personal property of value (such as jewelry, equipment, vehicles, etc.) can serve as security for a loan. Usually this would entail delivering the property to a third party who holds the asset similar to an escrow or consignment subject to performance of the terms of the loan. For assets which ownership is evidenced by some certificate of title, there may be a department or organization which provides for registering your lien (e.g. the Department of Motor Vehicles).

Securing your loan or investment with personal property is just one part of the due diligence that you should be performing when considering any particular investment. As this article demonstrates, the documents and procedures necessary to document, establish and perfect these secured transactions may vary widely and so you want to make sure that you follow the correct legal procedures and that your security documents are properly drafted so ensure that your loan or investment is, indeed, secure.