All business owners know how much time and effort goes into growing a successful enterprise. They meticulously run the day-to-day operations and set long-term goals, focusing on priorities from increasing revenue to fostering a customer-centered culture. But surprisingly few entrepreneurs plan for an inevitability in the business life cycle: succession planning. That is, what will happen to the business if one partner steps aside? The dissolution of a business partnership is not uncommon, but regardless, few companies are structured to manage these types of transitions when and if they become necessary.

Planning for a business partner’s departure is an essential step in running a venture that is set up for long-term profitability, scalability, and success. That is why every business with more than one owner should have a buy-sell agreement in place. Whether you have not yet formed the business or are in the middle of operating one, an attorney can help you draft a buy-sell agreement to protect the business when one partner departs it. Here, we give an overview of buy-sell agreements, discuss the key provisions, and explain why you should contact an attorney today to discuss drafting a buy-sell agreement for your business. 

What Is a Buy-Sell Agreement?

While it is not always an easy conversation to have, business partners should have a frank discussion about what will happen to the business should one partner depart. A buy-sell agreement is essentially a legally binding representation of that agreement among business partners. Buy-sell agreements have been described by some as “business prenups” since they lay out how a business will divide up its ownership assets upon the “divorce” of any of its partners.

On a more specific, granular level, a buy-sell agreement is a document or provision within another document (such as a shareholder’s agreement or LLC operating agreement) that details what will happen when one owner can no longer be an owner or no longer wants to be one. Usually, this occurs when an owner dies, becomes disabled, or wants to retire. The agreement will detail how ownership will be reallocated to the remaining partners or another pre-designated owner or manager. 

Key Provisions of a Buy-Sell Agreement

The primary purpose of the buy-sell agreement is clarity: for business owners, the goal is to create a clear, detailed roadmap for managers upon a partner’s departure. In other words, the goal is for there to be no mystery about how the business will handle its affairs. The agreement details exactly what will happen upon this event, instead of leaving it up to future negotiation, an executor of an estate, or even the courts. While a buy-sell agreement’s specific provisions will vary based on the business’ needs, there are a few key provisions that appear in most: 

1. Triggering Events
   Triggering events are those that activate the provisions of the buy-sell agreement, that is, the events that result in the right or obligation of someone else to purchase the departing partner’s ownership interest. These usually include, for instance, death, disability, divorce, bankruptcy, and retirement. 
2. Obligation or Rights to Purchase
   When a triggering event takes place, the buy-sell agreement will detail what happens next. Usually, this is either (a) the obligation that the remaining partner(s) buy out the leaving partner or (b) the rights of the remaining partner(s) to buy out the departing partner. 
3. Valuation
   Nobody wants to argue over money when a triggering event has occurred. For that reason, it is important to include an agreement about how to value and allocate ownership. This might include an agreement that an outside business valuation expert value the business at the time of the triggering event or provide another method for determining the purchase price.  
4. Funding Terms
   These terms set forth how the departing owner will be paid for his or her shares. This often includes the application of insurance proceeds since many business owners obtain insurance coverage on the life or disability of the other owners. Another common term authorizes the company to use its cash reserves to buy out the leaving owner.

Does Your Business Need a Buy-Sell Agreement? 

While there is no legal requirement that your business implements a buy-sell agreement, there are nonetheless a few compelling reasons to do so:

• Buy-sell agreements prevent owners from transferring ownership to a party the other owners would not want to engage. For example, upon an owner’s divorce or death, the owner’s spouse could acquire control of his shares. A buy-sell agreement would prevent that spouse from retaining ownership if the other business partners would prefer to avoid embroiling family members in the business’ affairs.
• Buy-sell agreements prevent costly litigation. Disputes among business owners are common. While this hopefully will not happen to your business, a buy-sell agreement can make an owner’s departure from the business less contentious and help you avoid litigation over issues such as valuation. 
• The departure of a business owner, and the transfer of ownership to a new owner, can cause unintended tax consequences. A well-structured buy-sell agreement can help owners avoid any tax surprises that may arise by virtue of a substantial change in business ownership.

How a Business Formation Attorney Can Help Your Business Draft a Buy-Sell Agreement

Whether your business is still a nascent idea or a booming enterprise, a business formation attorney can help you draft a buy-sell agreement tailored to your specific needs. Because these agreements can be complex, it is best to engage professional help to ensure you are planning for every possible contingency. This is the best way to prepare your venture for long-term success. 

Did you know that there is a way to maintain control over your medical decisions even if you were to become incapacitated? This is possible if you create a living will, a legal document that details your wishes for your medical care in the event you are unable to make decisions for yourself. A living will outlines your preferences so your family and doctors know what to do if you are unable to voice your preferences, for instance, if you find yourself sustained by artificial life support or reduced to a persistent vegetative state. 

A living will is an important piece of every estate plan, but many people do not know how these documents are used. Here, we discuss five things you might not know about these vital documents, which you can and should discuss with your attorney long before the need for one arises.

1. A “Living Will” is not A Last Will and Testament. 

If you have a last will and testament, or “will,” then you probably assume you do not need a living will. Right? 

Not so fast. A living will and a last will and testament are distinct documents with different intentions. A last will and testament details how you want to distribute your property after you pass. That document only applies after your death. On the other hand, a “living” will only applies while you are still alive, and it has nothing to do with your assets or property. Rather, a living will details your decisions and preferences for your medical care should you find yourself in a place where you cannot communicate them yourself. Specifically, a living will sets forth what medical treatment you want should you be sustained by life support or find yourself in a state of reduced capacity. By clearly stating your wishes ahead of time, a living will gives you peace of mind about these difficult decisions. It also helps your family members when it comes time to decide what type of life-sustaining care you should be granted.

For example, some people decide they do not want to be given any extraordinary forms of nutrition or hydration if a certain number of medical professionals declare that there is no hope of recuperation. Others specify specific means that they would like administered, and which they prefer to avoid. 

• A Living Will Is Not A DNR Order.

People often confuse living wills with “do not resuscitate” (DNR) orders. A DNR order is an agreement a patient makes with his doctor that he does not wish to be resuscitated if he suddenly becomes unconscious. This is mostly used after surgery or other hospital procedures. For example, if a patient has a DNR order in place and becomes unconscious while recovering from surgery, the hospital will not resuscitate the patient, even if that procedure might have saved his life. 

In the situation above, a living will would have no bearing on the hospital’s decision. Medical staff would likely still attempt to resuscitate the patient unless a DNR order dictated otherwise. A living will does not automatically grant that a person will not be resuscitated during a momentary lapse in consciousness. Rather, a living will is only invoked in limited circumstances – when the person is unconscious, terminally ill, and there is no reasonable chance of recovery. 

• Living Wills Go Hand-In-Hand with Healthcare Proxies.

If you have a living will or plan to execute one, consider drafting a healthcare proxy, too. Also called a healthcare power of attorney, a health care proxy is a person who is responsible for making health care decisions on your behalf when you cannot. A living will only applies when you are permanently unconscious and unable to communicate your wishes. However, in some situations, you may become temporarily unconscious, like after an accident. While these situations might not trigger the authority of your living will, you might still want a trusted person to make decisions on your behalf. In this case, your healthcare proxy would make those decisions. This person would also ensure the wishes in your living will are carried out properly if you were to become permanently incapacitated. 

• A Living Will Is Not Just for the Elderly.

You might think that a living will is just for the sick or the elderly, but this is untrue. Anyone over the age of eighteen should consider drafting and executing a living will. Accidents and illnesses occur every day, even to young adults who otherwise feel healthy and invincible. Without a living will, your spouse or parents are likely to be faced with difficult decisions about how – and whether – to continue life-sustaining treatment for you. Memorializing your wishes in a living will is a way to bring them – and you – some mental and emotional security. 

• You Can Revoke or Update Your Living Will at Any Time.

Making decisions about end-of-life care can be daunting. No one wants to ponder their mortality, and so they put off drafting their documents ad infinitum. But the uncomfortable reality is that an accident can happen to anyone at any time. Even if it is uncomfortable, spend some time deciding how you feel and what you believe about end-of-life care. Do you have specific moral or religious beliefs that dictate how you want to be treated? Are there family members you want to be deeply involved in the decision-making process? 

Keep in mind that getting something in place is better than waiting for perfect certainty: if you change your mind about your decisions or preferences, you can revoke or update your living will document at any time. Nobody else can do this on your behalf without your permission – you are the only person who can change your own living will. Remember, though, that a living will is a legal document that might be included with your other estate planning documents or files. So if you decide to change or revoke yours, be sure to track down all copies and provide anyone who might have had an old version a copy of the new one to be sure your current wishes will be followed. 

Bottom line: get something in place now. It’s okay if it isn’t perfect. 

Experienced Estate Planning Attorneys

At Wilson Ratledge, we assist clients in various aspects of estate planning, including drafting and executing living wills. Our experienced estate planning team can discuss your options and help you decide how to best proceed. Contact one of our attorneys today at 919-787-7711 or via our contact form below. 

When launching your own business, one of the first decisions you will need to make is what type of entity to form. Which entity you choose will influence how much personal liability you assume, how you will be taxed, how you are obligated to compensate your employees, and more. As such, taking the time to think through the best option for your business is a vital step you should never skip.

Here, we share an overview of the five most common entity structures. However, while this is meant to give you a basic primer on the entity types, you should ideally consult an experienced business planning attorney before making a final decision and filing your corporate paperwork. An attorney can help you ensure you are priming your business for success while putting the proper legal safeguards in place. 

The Five Most Common Entity Types

If your business is fairly typical, it will most likely take one of these five legal entity forms: a sole proprietorship, a limited liability company (LLC), a partnership, a C corporation, or an S corporation. 

#1: The Sole Proprietorship

A sole proprietorship is the entity type that offers the most administrative ease: there is no formal legal structure, but rather, one person owns and controls the business. To form a sole proprietorship, the business owner need not file any official paperwork with the Secretary of State’s office. This is because from a legal and a taxation perspective, the individual and the business are deemed one and the same. Practically, then, the business owner of a sole proprietorship is personally responsible for all of the business’s debts, losses, and liabilities. Additionally, the owner pays all taxes and reports profits and losses on Schedule C of his income tax return – there is no separate corporate entity filing.

While this is certainly the simplest way to run a business from an administrative perspective, there are clear drawbacks, namely, the lack of liability limitation. Since the business owner and the entity are deemed the same, any legal action leveled at the business will attach to the individual as well. This means that any judgment creditors of the business can come after the individual owner’s personal assets. 

Business owners certainly have a compelling interest in separating themselves from their entities to preserve a liability shield. This is where the LLC comes into play.

#2. The Limited Liability Company (LLC)

An LLC is considered a hybrid entity because it has features of both a partnership and a corporation. LLCs are owned by one or more people or entities, known as “members.”

Like a corporation (and unlike a sole proprietorship), LLCs offer personal liability protection for its members. The business is a formal legal structure with a separate identity from that of its members, so with a few exceptions, creditors of the business cannot attach a judgment to the owner’s personal assets. LLCs also provide flexibility when it comes to taxes, as members can choose whether they are taxed as a corporation or as individuals. As with any entity, taxes can get complicated with an LLC, so it is best to consult a small business attorney when forming one and selecting your tax treatment. 

#3: The Partnership

A partnership is a slightly rarer entity – the majority of small businesses are run as sole proprietorships or LLCs. A partnership consists of two or more individuals who own and control a business. It is similar to a sole proprietorship, except that profits, debts, and liabilities are shared among partners instead of borne by the sole proprietor alone. Each partner files his own taxes for their share of the profits and separately report their losses.

There are two types of partnerships: general and limited. In a general partnership, partners share all profits and liabilities equally. Conversely, in a limited partnership, some partners have a limited share of the profits and a limited share of the liability, depending on how ownership is allocated among the partners. 

#4: The C Corporation

A C corporation is a common entity form for larger businesses with employees. Like an LLC, it is considered a separate legal “person” from its owners. A C corporation (often just called a corporation) is owned by its shareholders and run by a board of directors and management. 

Because a C corporation is a separate legal entity, the entity, not the owners, is responsible for the business’s debts and liabilities. Likewise, a C corporation is taxed separately from its owners. Additionally, C corporations are subject to “double taxation,” meaning that revenue is taxed both when it is earned and when it is distributed to shareholders. This is why many smaller businesses form as LLCs, which have the option of single taxation (at the revenue level only). 

#5: The S Corporation

The second type of corporation is called an S corporation. To become an S corporation, an entity must always form as a C corporation and then apply to become an S corporation. S corporations also provide limited liability protection to shareholders and are run by a board of directors and management. 

The main difference between the two types of corporations is that S corporations pass their income, losses, deductions, and credits on to their shareholders, who then file this information on their personal income taxes. The corporation, therefore, does not pay its own federal income taxes. 

Important Questions to Ask Before Selecting an Entity Type

Every business entity is unique, but there are some key questions to ask yourself (or your attorney) when deciding on your business entity. These include: 

Will you run the business alone or with someone else? 

If you are starting a business alone, you can choose any of the above entities except a partnership, which requires two or more partners to form. If you are starting the business with at least one other person, you can choose any of the entities except the sole proprietorship. Do you want to limit your personal liability?

Depending on which entity structure you choose, if your business cannot pay its debts, your personal assets as the owner could be at risk. You may want to consider forming an entity with limited liability protection, such as an LLC or C corporation. Sole proprietorships and general partnerships do not offer limited liability protection. 

Can you keep up with the administrative requirements?

When you own a business, you are obligated to make various filings with your state’s Secretary of State’s office, depending on your entity type. If you are looking for simplicity, a sole proprietorship tends to be the most manageable entity to form and run. However, your business needs might be better suited for a more formal legal structure, such as a C corporation, which requires appointing directors and officers and filing documents with the state. Consult your attorney to determine the filing and administrative requirements that accompany each entity type before making your final decision. 

Which Entity Should You Choose?

Every small business is different, and each entity type offers pros and cons. At Wilson Ratledge, we help people every day to determine how to best set up their new venture, and hope this article has helped you feel well-equipped to discuss these options with an attorney and be well on your way to establishing your small business entity.