Business Formation and Succession

Why do people form Businesses?

People form businesses for a multitude of reasons, but here is a list of some common reasons:

  1. Asset Protection
    • One of the goals of forming a company is that your personal assets are shielded from a company’s liabilities.  While forming a company is not a guarantee that your personal assets will not be at stake, it does add a layer of protection to your overall estate plan.
  2. Rental Properties
    • Someone that owns one or more rental properties might want to consider setting up an entity to hold the properties not only for asset protection if a renter slips and falls, but also because there may be tax or other financial advantages.
    • Putting your rental properties into an entity also can add a layer of privacy from your personal information being available to any tenants.
  3. Professionals
    • Whether you are a doctor, lawyer, CPA or entrepreneur, a company can be a way to provide legitimacy and professionalism to your specialty.
    • Your personal information and personal assets may be shielded from clients and patients.
    • There may be tax benefits.
    • The company can provide a way for you and your employees to receive health insurance.
    • You can implement the policies and procedures of how you want your company to run, and also provide clarity in regards to ownership and voting interests.

What are some things to consider before I form a company?

  1. Come up with a name, and at least two back up names in case your first choice is unavailable.
  2. Decide what type of entity you want to set up, whether it’s a non-profit or for-proft corporation, limited liability company, limited partnership or other entity.  It is a good idea to consult with an attorney and CPA before finalizing this decision.
  3. Decide how you will be taxed.
  4. Decide what percentage ownerships will be assigned and who will have voting rights.

One final consideration

Most people think about forming a company, but few people have succession plans in place if they currently have an ownership interest in a company.

  1. Do you know what happens to your interest if you die?
  2. What happens if you become incapacitated?
    • Who would run the company?
    • Who would vote your interests?
    • What if you are the sole member or director?

A business succession plan should be designed at the same time as the rest of your estate plan, so that everything coordinates.

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