Business succession planning is essential to any business for a number of reasons. These include:
- Ensuring a smooth transition of ownership and management.
- Maintaining continuity of operations in the event of the death or incapacity of a current owner or key executive leader.
- Identifying and preparing potential candidates for key leadership roles.
- Providing legal and financial protections for the business and its stakeholders.
- Contributing to the overall success and growth of the business.
- Ensuring compliance with relevant laws and regulations.
- Maintaining peace in the family.
In North Carolina, businesses must adhere to various legal considerations and requirements when engaging in succession planning.
In this article, the North Carolina business succession planning attorneys at Wilson Ratledge will outline basic succession planning options and some of the key legal considerations.
Legal Considerations for Succession Planning in North Carolina
There are several legal considerations that businesses in North Carolina must take into account when engaging in succession planning. These include:
a. Business Structure: The type of business structure, such as a sole proprietorship, partnership, or corporation, will determine the legal requirements and procedures for succession planning. For example, partnerships may require the execution of a partnership agreement outlining the terms of succession. At the same time, corporations may need to follow specific procedures outlined in the articles of incorporation and bylaws. S corporations in particular must adhere to IRS rules regarding eligible S corporation shareholders.
b. Transfer of Ownership: The transfer of ownership in a business is subject to various legal considerations, such as the execution of a buy-sell agreement and estate planning documents (wills and trusts) to implement the terms of a buy-sell agreement, orderly transfer of business interests, and planning for minimizing, while having liquidity for, the payment of any applicable taxes. It is important for businesses to seek the guidance of an attorney when engaging in the transfer of ownership to ensure compliance with relevant laws and regulations.
c. Management Succession: The process of transferring management responsibilities in a business can also be subject to legal considerations, such as the use of key-man (or key-person) life insurance, executive compensation, the joinder in a limited liability company operating agreement or partnership or limited partnership agreement. It is crucial for businesses to consult with an attorney to ensure that the management succession process is carried out as smoothly as possible and in accordance with the law.
North Carolina and Federal Laws Governing Succession Planning
There are several North Carolina and Federal statutes, many with related regulations, that businesses and business owners must consider when engaging in succession planning and implementing a succession plan; however, none of these spell out any automatic process in the absence of planning. These include (among others):
a. North Carolina Business Corporation Act
b. North Carolina Limited Liability Company Act
c. North Carolina Revised Uniform Partnership Act
d. North Carolina General, Limited, and Limited Liability Partnerships
e. North Carolina (wills and estates 28A-31?)
f. North Carolina Uniform Trust Code
g. Subchapter C of the Internal Revenue Code (Federal Taxation of C Corporations)
h. Subchapter S of the IRC (Federal Taxation of S Corporations)
i. Subchapter K of the IRC (Federal Taxation of Partnerships)
k. Federal Estate and Gift and Generation Skipping Tax
Tips for Successful Succession Planning in North Carolina
Here are some tips for successful succession planning in North Carolina:
a. Start Early: It is never too early to start planning for succession. By starting the process early, business owners can ensure that there is sufficient time to determine long term goals, identify and prepare potential candidates to own and lead the business in the future, and to implement the necessary legal arrangements.
b. Involve Key Stakeholders: Succession planning should involve the input and participation of key stakeholders, such as the current owner and potential future owners, key management personnel. This will help to ensure that the succession plan reflects the needs and goals of the business and all parties involved.
c. Communicate Openly and Transparently: Communication between potential successors and beneficiaries is often key to successful succession planning. This will also help avoid potential legal disputes, such as those involving a contest of the owner’s will in the case of a family business, or those involving disgruntled key management or other personnel.
d. Seek Professional Advice and Assistance: Engaging the services of a professional advisor, such as that of a North Carolina business attorney at Wilson Ratledge, will guide you and help you navigate the many succession plan options and their legal and tax considerations.
e. Put the Plan in Writing: This applies to everything. We have mentioned a few crucial documents already, and successful implementation of your succession plan requires a package of clear and consistent documents that will work together to ensure the smooth transition of your small business as part of your overall estate plan. The documents typically required include some combination of the following:
i. Buy-Sell Agreements (also known as Shareholder Agreements or Member Agreements)
iii. Trusts (there are multiple options for trusts in succession planning)
iv. Operating Agreements
v. Partnership or Limited Partnership Agreements
f. Review and Update the Plan Regularly: Succession plans should be regularly reviewed and updated to ensure that they remain relevant and reflect the current needs and goals of the business and key stakeholders.