Succession planning helps your business survive you [webinar]
Watch the webinar “A Business Owner’s Guide to Asset Protection and Succession Planning
Why S Corporations and C Corporations are not the best for your business
Before the advent of the LLC, the corporation was the only practical entity for the business owner from an asset protection point of view. The choice was then between the S Corporation and the C Corporation. Now the LLC is the third and most prevalent option. Most small business owners, in the past, elected the S Corporation over the C Corporation due to its tax benefits. Larger corporations normally elected the C Corporation because of its number and diversity of stockholders. The C Corporation, of course, carries the burden of double taxation.
The S Corporation may be the worst entity to own from an asset protection point of view. It is far more difficult to protect S Corporation shares than C Corporation shares. C Corporation shares can be protectively titled to limited partnerships, irrevocable trusts or other entities. But these methods are unavailable to protect S Corporation shares. Thus, it is far more difficult to lawsuit-proof S Corporation shares because of its ownership restrictions. S Corporations can be owned by single-member domestic or international LLCs. S Corporation shares can also be owned by a sub-trust of an international asset protection trust – although this arrangement is more complex. One may also encumber or pledge S Corporation shares, as you would encumber C Corporation shares or any other asset. Again, the method we use in any given case depends on the circumstances.
A major protective advantage of the LLC over the S Corporation is that the LLC affords you more ownership options. For example, your LLC can be owned by a limited partnership, a trust, another corporation, etc. Also, an LLC has flexible tax options and can offer the same tax benefits as an S- Corporation. More importantly, an ownership interest in an LLC is considerably more creditor-protected than shares in an S Corporation which can be easily seized by a stockholder’s personal creditors. In an LLC, a member’s personal creditor is generally limited to a charging order against the LLC interest, which gives the creditor only the right to receive distributed profits due the debtor partners.
How to protect your business from personal and business creditors
The goal of business owners should be to title as few valuable assets as possible to their operating company. Why lose valuable assets if their business fails or is sued? It’s smarter to title these more valuable assets to another entity to isolate them from the business’ creditors. These assets owned through another entity can then be leased or licensed to the operating company.
For example, we title our clients’ real estate separately. For instance, if your building is titled to your business’ corporation or LLC, the business’ creditors can then claim the building as a corporate asset. So why expose the real estate? It’s smarter to title the real estate to a separate Limited Liability Company. The real estate then remains yours, no matter what happens to your business. Similarly, you want to title equipment, furniture and fixtures, trademarks, trade names, copyrights, patents, domain addresses and other proprietary rights to separate entities and then lease or license these assets back to your operating company. Your objective is to limit the business’ creditors to the fewest and least valuable assets. You can then sell or use these valuable and protected assets to start another business or for your personal profit. In any instance, they won’t be lost to your business’ creditors. That’s smart planning. But it takes foresight and a defensive mindset.
Business succession at a glance
Succession planning is essentially estate planning for businesses. It is an essential tool to use in protecting your business interest as well as maximizing the value of your business for your loved ones, and how to ensure that all of your key employees will keep their job even when you’re gone. Another major benefit of succession planning is it allows for assurance of an agreeable price for the departing partner’s share. Furthermore, succession planning allows for the ability to buy the departing member’s share quickly and with no liquidity with policy benefits and no interruption in business. A great strategy is to make sure your operating agreements are bulletproof and dictate exactly what happens when an owner or member of the business passes away. This way, there is no room for interpretation as to what happens to the business.