2 Very Important Ps in a Smallbiz Estate Plan
Knowing why and when to start succession planning (read here) allows us to move on and address the personal and professional practical considerations of succession planning. The first personal consideration can be assessed by thinking about the following questions: What do YOU want from your succession plan? Do you want your business to continue after you retire, to stop when you have sufficient income to retire, both – which would be similar to semi-retirement, or something else? The 4 basic personal goals surrounding succession planning are: (1) creating a legacy; (2) obtaining sufficient income to retire completely; (3) both – creating a legacy and semi-retirement; or (4) something else, perhaps creating a new career entirely. Once you’ve answered these questions, next you should consider another personal matter and how it aligns with the answer above. This helps define realistic objectives. This personal consideration involves your dependents: Who depends on you now? Who is likely to depend on you in the future? And what might that dependency look like? Being an emotional and psychological support weighs heavier than we often know. So, if this type of support isn’t managed well, it will drain our energy, time, and motivation. How we sustain this loving nature without harming ourselves will be discussed in another week or so, but let’s move on to look at other dependencies. Sometimes supporting someone financially is easier than providing emotional support; sometimes it is not. Perhaps you have or someone you know has family members who phone when the electric bill is too high, when the basement has flooded, or when the church needs a new roof? Perhaps you have a relative whose spouse or partner passed away leaving a minor child to be taken care of by a single parent? Often connected to emotional and financial dependency is physical dependency, typically accompanying caring for a disabled loved one. Your succession plan must account for of these factors and possibilities or your objectives may fall short and you or loved ones may suffer. Once completing this difficult work, we can address the less difficult matters – professional considerations. Last week’s digression, covers the first professional consideration, which is deciding your business’s legal entity, i.e., a LLC or S-Corp. In very limited situations, would one actually consider a sole proprietorship, partnership, or C-Corporation, so those entity choices weren’t discussed. Having decided on a legal entity, the next professional consideration is your market. Who is your market and how can you differentiate your business from your competitors? First just think about the people who may want or need your services or product, e.g., women with bird cages that need regular cleaning. But what if you’re already in business? One idea, for those who provide personal services, is to take the average age of your oldest and youngest client; next consider the source of your highest quality referrals who fit within that average; and then of those clients, what work did you find most enjoyable: talking to the birds, letting them fly around the house, or making their cages shiny? After creating this “niche,” the issue of differentiation remains, which requires performing a lot of research – the competition, customer demand, external variables, and more. After compiling your research, you should be able to determine how you can differentiate your business from your competitors. And yes, we’re still talking about succession planning because to create a winning succession plan, you have to create a winning business. And why is succession planning important to estate planning? If you\’re a smallbiz owner, what are you going to do with the business you once owned? A good estate plan will help answer that question. The Smallbiz Success Series: Decision 3 | Succeed Today | Personal & Practical Points | Relax & Retire
#3 of 3,987: LLC or S-Corp?
So you’ve decided to start your own small business (\”smallbiz\” or \”SMB\”). Welcome! It’s one of about 3,987 decisions you will have to make. Presuming you’ve already selected a name, for Illinois citizens – at least checked the name with the Illinois Department of Business Services, and then registered your domain name, the next important step is deciding on your business’s legal entity. In most states, including Illinois, business entity choices are; Sole proprietor, Partnership and its various forms, Limited Liability Company (LLC), or Corporation and its various forms, including Subchapter S Corporations (S-Corps). Because individuals tend to believe, however erroneously, that business owners are wealthy, business owners are often litigation targets. Accordingly, it’s unreasonable to operate a business today without some type of legal liability shield in addition to your insurance, which is lacking if you\’re operating as a sole-proprietor or even a partnership. Limited Liability Partnerships (LLPs), while providing limited protection, are not as owner-friendly as LLCs and corporations. Consequently, the use of partnerships has declined substantially. A smallbiz owner is typically advised to choose a LLC or corporation. By doing so, not only can the business take advantage of the legal liability shield, the owner can “pass through” the income profits and losses to his or her individual tax returns. A LLC is treated like a partnership for tax purposes and shareholders of a corporation that selects S-Corporation (S-Corp) treatment can pass through profits or losses. So, unlike C-Corporations, no double-taxation occurs with LLCs and S-Corps. Smallbiz owners tend to prefer LLCs over S-Corps because LLCs, which can also elect S-Corp tax treatment, require fewer formalities. S-Corps require annual shareholder meetings, corporate record-keeping, and quarterly tax filings. Additionally, the Illinois LLC Act allows for either narrow or expansive provisions in a LLC’s Articles of Organization and Operating Agreement. LLCs also offer other advantages, including: an unlimited number of shareholders, no citizenship requirements, few restraints on purpose or asset class, and different stock classes. Still, LLCs that don’t select to be treated as S-Corps, must pay estimated self-employment tax on all income received whereas S-Corps are not required to pay income tax on profits held for reasons other than employee wages. Also, if one depends on profits for your wages, as a single-member LLC (SMLLC), you may lose earnings if your business is sued and no distributions can be made without settling the judgment first. As a smallbiz owner, your entity selection depends on how much flexibility you want and what your current situation dictates, i.e., how much capital you need, how much liability protection you need, and the type of business partners you have. LLCs require less administrative work than S-Corps but capitalization needed for growth is often obtained from institutions that require a record of formalities, which S-Corps also require. Still, an LLC can, through its Articles of Organization and Operating Agreement, require all the formalities of a corporation and more. So… Now, you only have 3,986 decisions to make. The Smallbiz Success Series: Decision 3 | Succeed Today | Personal & Practical Points | Relax & Retire
3 Tips on Succession Planning – Before Needing an Airbag
The previous article discussed succession planning formula for a more successful business today. This week I’ll briefly cover how succession planning helps improve retirement and more importantly, when that succession planning should begin. At its core, succession planning is about tomorrow, our “retirement.” And proper succession planning creates important retirement benefits. As an estate planner with a number of financial planning colleagues, I can attest to the fact that we may have several methods and vehicles to protect and grow your assets and with a proper succession plan, those options may increase dramatically. However, without a proper succession plan, the options could dramatically decrease. Added benefits to retirement include: Being able to withstand harsh bear markets; Having a more secure retirement because your plans are more realistic; Retiring more efficiently and with fewer adverse tax implications; and A Less stressful retirement, even if you experience 1 or 2 bumps in the road. Most importantly, a properly executed succession plan eliminates the need for a “garage sale.” So as I said previously, in addition to making more money, establishing and implementing a succession plan results in an even more successful business today and a relatively stable and peaceful retirement. Now, some of us have a good idea on when we would like to retire but there is an ideal time to start succession planning and that time is before opening your doors for business. If you incorporate succession planning when drafting your business plan, then you will ultimately use and allocate resources more efficiently and plan realistically. Moreover, you\’ll establish processes that are key to a successful business sale or shareholder transfer. You may also realize that the most important factor in executing a successful succession plan is having a well-developed successor. Sometimes, we don’t start actually planning at the beginning. Many of us just do and do and do without stopping and taking the time to think about where all this “doing” is leading. But even if you’re 10 years into your business with about 10-15 years to go, it’s not too late. You probably have some advantages, e.g., a steady clientele or a steady and established referral base; a solid understanding of the rules, regulations, and best practices applicable to your business; “brand equity” among your peers and in your community; staff, if you have them, who are loyal; and if you’re anal, like me, you have helpful processes and spreadsheets in place to get you through the day, week, month, year, and decade. Conversely, 10 years in you may have some disadvantages: too many processes, some of which are inefficient or redundant; and you could be stuck in a time warp working against yourself, treating yourself like an employee and your business like a job, instead of CEO and enterprise. New business owners even with great business plans are also disadvantaged because the business is…new. So mistakes are going to be made and newbiz owners won’t be able to plan for all of them. It is when the business shingle is rusty that folks should proceed quickly but with caution. At age 60-65, triage may be needed, but there\’s still hope. At 66 – 70, like Will Smith said in the movie, Independence Day, “I hope ya gotta an airbag!” And at 70 ½, I think land in Jamaica is reasonable. Knowing why and when to start succession planning, we can move on and discuss the personal and professional practical considerations..Next week! The Smallbiz Success Series: Decision 3 | Succeed Today | Personal & Practical Points | Relax & Retire
How to Create Value in Your Smallbiz Now
Recently, I spoke to a group of women business owners about succession planning. Some were in business for more than 15 years, others for 4-5 years, and others had just started. Because succession planning is an integral part of estate planning, over the next couple of months, I will share a few insights from that meeting for readers who are or who advise smallbiz owners. So, let’s get started… When considering succession planning, where WE are also our clients, we must ask ourselves 2 questions and answer realistically: (1) WHY are we planning and (2) WHEN is the best time to plan. We all know the obvious answer to why to make MORE MONEY for “retirement.” However, beyond making more money later, succession planning provides 2 ancillary benefits. One benefit is that it can provide a more successful business NOW; the second benefit is that “retirement” will not be chaotic. How does succession planning help your business now? As you begin succession planning, to ensure your plan’s success, you must shift your perspective from that of a “job holder” who happens to run the job to that of a CEO who runs a multi-faceted enterprise. This “multi-faceted enterprise” idea may seem a little wonky at first. But if you consider all the hats you wear during the week to accomplish all the functions needed to service your clients or customers, you’ll get the picture. With proper succession planning, even solo business owners eventually shift from doing everything to delegating non-critical components to others, freeing up time to address critical components, performing essential leadership functions, and doing some fun business activities, such as blogging, tweeting, or connecting in person. As you make this shift from job holder to CEO, finding personnel or appropriately using current personnel to perform non-critical client/customer functions, something else occurs to benefit your practice now and in the future: personnel morale increases and, consequently, personnel become more productive. By shifting our perspective, we become more conscientious when hiring, even interns or part-timers, and create more current value for our business. You will recognize – for the sake of your succession plan – the need to nurture, groom, and develop the talent. Today’s buzz word is mentoring. But these aren’t just mentees; these are individuals who work for you and who you want to continue working for you. As a solo or smallbiz, your talent development program may not be formal, but it should at least be a cognizable, supervisory, mentoring program with regular reviews and 30-60 minute “check-in” meetings. Now, you may wonder how you can afford to carve out this time in such a competitive environment like the one we’re in today. Frankly, that’s being short-sighted. Because if you’ve been mentored or supervised by an outstanding boss, then you can probably recall your morale lift and sense of pride you felt as you developed. You can also probably recall the converse, when you were treated like a minion, degraded, and dismissed. By providing personnel with meaningful tasks, constructive feedback, and respecting and giving them credit for their good ideas, we’re creating more productive personnel, thereby actually giving us more time to devote to VIP client and customer matters. This makes clients happier and happy clients are good referral sources. So this answers one of the “why\’s.” The next piece, will consider the other \”why.” Stay tuned… The Smallbiz Success Series: Decision 3 | Succeed Today | Personal & Practical Points | Relax & Retire
Einstein\’s Theory the \”Fiscal Cliff-mas\” Ain\’t
It is unlikely that Congress will come to agreement before January 1, 2013. Ergo, the middle class will take a hit – a number of hits. It will be challenging and we will prevail. We will feed, shelter, and educate our children; we will grow our businesses, careers, and gardens; and we will laugh, cry, and argue. There may be a pack of chewing gum in the stocking, but there will be no coal. There may be a used candle lit each day, but a candle will be lit. Prayers will be offered morning, noon, and night. Chanting and asanas will occur. Quantum mechanics, string theory, and Einstein\’s Theory of Special Relativity will continue to be studied and used as a basis to explain existence. Though Einsteinian intellect isn\’t required, Congress doesn\’t get it while dozens of leaders of major corporations do. These leaders, like the middle class, understand and support the need and the plans seeking tax increases on corporations and the very affluent, which I will define here as the top 2% of our country\’s population. And we in the middle class know that spending cuts are also necessary and we\’re willing to decrease funding for valuable programs. We already have and are still willing to go further but not without some give from the other side. Accordingly, we\’ll take care of our families and businesses the best way we can until Congress realizes that political posturing, scare tactics, and continued polarization and gridlock does not work for our country. Furthermore, kudos to the women engaged in this conversation. I\’ve heard repeatedly, from fiscally conservative women and women who are as liberal as liberal can be: \”Me and my family will take the financial hit; we\’ll work with that. Just don\’t diminish our civil rights or the rights of others because those rights are more important than money.\” That may sound \”warm and fuzzy\” to some, but the rights of others include the right to be recognized as a family, the right to determine how your family will grow in number, the right to determine how your child will be educated, and the right to determine how, where, and if you can practice and express your spiritual beliefs. Ergo, \”warm and fuzzy\” and critical are not mutually exclusive terms that can be applied to legal rights. So, despite the posturing and \”warm and fuzziness,\” we know this isn\’t quantum theory and when asked my thoughts, considering the millions of families who will be impacted but are resilient, with great umbrage toward Congress but great pride in the American spirit, I simply repeat the prudent words of a colleague who stated on a list serve during a mucky debate about guns and religion from which he refrained to participate, \”Carry on.\”
Preventing Family Feuds for the Smallbiz Owner
At a Chicago Bar Association’s Solo/Small Firm Committee Meeting, I gave remarks on why estate planning is not a “basic” endeavor. A favorite example was a about Ms. Small Biz (Ms. SMB) who was married to Mr. Manager and had College-Age Children. It’s a favorite example because it identifies the issues contemporary families comprised of smallbiz owners may confront with respect to business planning, disability, death, and succession planning: Ms. SMB is the sole proprietor of a small, lucrative, and growing graphic design firm. She has 3 employees in addition to herself, and her son works part time during the school-year and full-time during the summer. Her daughter, however, has no interest in the business. But Ms. SMB has great vision for the business with a Pinterest page, a blog, and even a design auction website. Her husband is satisfied with his position as a midlevel manager with a software company. So the family is happy and enjoying its status. For several years now, Ms. SMB has been consistently reaping the fruits of 10 years of hard work and wants to ensure that in the event of her disability or death, her family and business are safe and wrapped up in a neat little package. So how should the estate planning attorney assist? First, we should assess the following: her stand-alone net worth; when the last time, if ever, was her business valued; what is the best legal entity for her business (at this point it should not be a sole proprietorship); who will run the business – digital assets and all – if she suffers a long-term illness; upon her death does she want the business sold or transferred to her son or her son and employees, or family and employees; who will wind the business up if she wants it sold; and if it is sold who gets what and in what form? Undoubtedly, Ms. SMB will need a will or a trust. She will also need to consider the tax implications of the business entity, e.g., LLC, S-Corp, FLP, she decides on. And what about those digital assets; do we need to consult with an IP colleague? However, what is equally important is her decision about what to do with the business at her death. This decision will weigh heavily on her attorney’s counsel about choosing fiduciaries. For example, will that person understand her business, can he or she successfully execute a buy/sell agreement, and can he or she manage winding up the business? Additionally, she wants to provide for both children equally. But giving half of the business’ financial interests to the daughter when the daughter has shown no interest may start a family feud between the siblings. Perhaps life insurance may help and may help in two ways. Once, the attorney ascertains the value of her business and, subsequently, her estate, life insurance can help lower the value of the estate for estate tax purposes and equalize the gifting between her two children. This example shows that smallbiz owners have a several critical decisions and options to make and consider at the start and near the end of their involvement with their businesses. Also, because the decisions made in the beginning can significantly affect the options with respect to succession planning, new smallbiz owners should seek to create a business plan that isn’t a stand-alone plan, but one that also encompasses estate planning. Ms. or Mr. Smallbiz & Family is just one of the faces of today’s family and the multiple faces and overlaps of today’s family shows why estate planning isn’t a “basic” area.
Be Sure to Consider the Coin\’s Third Side
I wrote this piece before “the election” after reading an article on the “what if” of an election tie. Each party’s camp, of course, believed their candidate was going to win with a considerable margin. Yet, each party’s camp also had a team of lawyers already prepared for the “what if” of a tie. The article reminded me of a lesson I learned long ago from a very wise woman. And that lesson is that every coin has 3 sides, not 2 but 3. Moreover, irrespective of how unlikely it may be that the coin will land on its third side, that likelihood should never be ignored. The lesson of the third side is one I share with not just clients but everyone I can. However, let’s talk about estate planning for a minute. Of course, there’s no “what if” about death; we’re all going to die one day whether we want to or not, but estate planning is about much more than death. Consider the phrase, “estate planning”: Legally speaking your “estate” is everything you own. “Planning” is self-explanatory. So, estate planning is about planning for what you own. If you have loved ones, this plan naturally includes determining how those assets will be distributed to your loved ones during your lifetime and upon your death. The lesson of the third side is also about the “what ifs” of estate planning: Today, you’re a young couple with an infant and nothing but life insurance and what if…you win the lottery? Your parents left you with a substantial inheritance, which could have adverse tax implications for you, what if…there was a way you could roll it over? Your health is fine, your kids are adults and financially stable, your estate is sufficient to see you through retirement and what if…you don\’t own a home? You want to start taking a lot more time away from your small business, which you’ve successfully established and maintained over the last 15 years, what if…you\’ve been the sole proprietor all those years? This year, you’re taking advantage of the homestead exemption for your residence but you’re approaching retirement , want to give the house to your children, what if…you still need a place to stay? Like millions of others, you’re now behind retirement planning because Enron, the subprime mortgage, and the boyz on Wall Street took a chunk out of your 401(k), and what if…your partner becomes seriously ill? Today the federal estate tax exemption is $5.12 million; if Congress does nothing by December 31, 2012, what if …on November 30, you had sold your business for $8 million? Gran always said the third side is the least best or worst expected outcome. Consider the coin’s third side as you plan and you’ve planned just about as well as you can.
5 Smallbiz Takeaways from Torrents and Blizzards
In the wake of Superstorm Sandy was nearly unfathomable destruction of lives and businesses. However, the American spirit is resilient and, together, we\’re recovering. It is simply taking time. During disasters of that magnitude, we often chide ourselves for not being prepared or as prepared as we could have been because much more needs to be done long before the insurance check arrives. As an attorney and smallbiz owner who assists clients with preparing legacies and for potentially unpleasant events, the need to prepare for disasters isn’t lost on me. Smallbiz owners and their families who depend on the businesses\’ earnings are particularly vulnerable, so it\’s critical that we have a continuity plan for emergencies. Like the preparations outlined in a business plan that consider key operations and resources, so should your continuity plan. Below, are a few questions smalbiz owners should consider when devising a disaster recovery plan. Caveat: This list is by no means exhaustive, comprehensive, or tailored to any particular business. It just serves to help us prepare for the next storm. What would an all out disaster look like for your business? Consider the elements – wind, fire, earth, water – and how extreme amounts of any would impact your business operations, e.g., causing network outages, inventory destruction, and so forth. What are the procedures that would put your business back on track and, specifically, who will be responsible for what and when and how will they perform the necessary tasks?a. Who will lead the team or how will tasks be divided?b. Who will contact clients and vendors, and how? What if cell towers are down?c. Is the disaster just affecting your business or is it also affecting clients?d. What if the disaster occurs “after hours”?e. How will you assess the overall impact to your go forward? Which business resources or operations are likely to suffer more, e.g., are you a restaurant owner with no electricity but with a refrigerator and a freezer full of food? Are your clients local but your employees commute from long distances? Where are your critical client or customer files stored? What if you can’t access the building or your company’s network? Where exactly is your \”cloud?\” Can you temporarily relocate your business, where and do you have sufficient resources to do that? Indeed, this is a “short list” to help small business owners think about a particularly unpleasant topic. Yet, we smallbiz owners know that asking the important “what ifs?” often saves a bundle down the line, despite the torrential downpours, tumult in the streets, blazes, or blizzards. The Law Offices of Max Elliott continues extending its thoughts and prayers to families and businesses who experience disaster as winds of change forever sweep our world.
6 Not-so-Legal Ways to Protect Your Family
It seems there\’s a week, day, or month to celebrate every relationship and, accordingly, the third week in October has been designated \”National Estate Planning Week.\” Why we, estate planners, have a week dedicated to our practice area may, at first glance, seem self-aggrandizing. Yet, estate planning isn’t about lawyers but estate planning is about how individuals can protect their loved ones. Lawyers and other professionals simply guide the way. So instead of calling this week “National Estate Planning Week” maybe we should call it “National Family Fortification Week,” hmmm… Then again, I was going to suggest “National Family Planning Week” but that, too, could have been very misleading. Well, as they say, “a rose by any other name…” Throughout The Lotus Rules (fka the Shark Free Zone) are pieces explaining why estate planning is for everyone and not only the 1 percenters, discussions on basic estate planning documents, analyses on historical and pending cases and legislation involving relationship rights, and scary stories about car crashes and funeral home terrorists. However, I think this is the first post on point for fortifying your family, so welcome. Take simple steps early. If you’re a working young adult with loved ones, then you need a plan to keep potential serious illness or untimely demise from causing your loved ones even more grief. Your plan could be as simple as Powers of Attorney and life, health, and disability insurances. Tell your loved ones that they are indeed loved: “Mom, I won’t let you mortgage the house to pay for my medical bills and, here’s the agent information for all of my insurances.” Tears will probably flow but they\’ll be happy, proud tears. Teach your children the important lessons about life and money early, e.g., age 6, exemplify for them that living a happy and productive life is the goal and money is one tool that can help them reach that goal. Tailor your goals for you and your family; you\’re unique. An estate plan isn’t a goal; it’s another tool. Still, some wrenches are better than others. The same thing applies with respect to estate plans. A good estate plan just doesn’t involve obtaining life insurance, throwing funds in a retirement account, and creating a will. Those are good steps, but before taking those steps consider who will be your trusted advisors. Who\’ll take the time to get to know you and your family, work the plan, helping guide you and your family along over the next few decades? Take your time. OK, so you didn’t start out when you should have and you haven’t taken any steps yet, but holy crap, someone very close to you just passed away and surviving are kids, a dog, a spouse and…you want to do something NOW! Don’t. Well, don’t make any rash decisions, interview a few attorneys, talk to a few friends, chat with a few financial planners, and after the pain of losing a loved one has lessened, then start building your team. It will likely save you tons of resources down the road. Trust your team. Because of the attorney-client privilege issue, loved ones are not typically part of the initial consultation, but sometimes, if they\’re the cornerstone of the family or if a family business is involved, perhaps they should be. Make the initial meeting a \”let\’s get acquainted\” team meeting loved ones and professional advisors can give each other the \”sniff test.\” Discuss the broad strokes: wanting to ensure that the family is protected, that everyone knows who the “team” is, and create a comfortable, collaborative environment. Then later you can meet or speak with the attorney one-on-one regarding specifics. Estate planning is a technical practice with many complex moving parts, but some fundamentals have nothing to do with instruments and everything to do with being a loving family member.
80% Get It Wrong…
In the digital age, it\’s rare that potential clients haven\’t done research before contacting our firm. So, when speaking or meeting with them, it\’s important to hear what they\’ve found. Sometimes it\’s factually correct, but not for their case; sometimes it\’s factually incorrect with respect to their case; and often the pieces just don\’t fit together at all. So then I say, \”Think about this…\” And, as colleagues continue to criticize DIY services, as online legal documents services proceed with IPOs, and as folks continue to ask me to opine, I thought these few facts may be worth sharing: