Your corporate structure can impact your options around succession planning. What’s the difference between a corporation, and LLC, and a partnership?
Ultimately, which corporate structure is the right for your company depends on your industry, short and long term goals, as well as your stakeholders. The right structure for your business can evolve with your company’s growth also. The following are common structures when thinking about entity formation:
Partnership: General partnerships are simply business structures governed by an operating agreement between individuals. While partnerships offer entrepreneurs flexibility, they require partners to assume responsibility for the business’ debts as individuals.
LLC: A Limited Liability Company structure creates additional flexibility between partners, investors, and cofounders, compared to a corporation structure. An LLC is more or less a contract: a founder files articles of organization/certificate declaring the businesses status within the state. LLCs are often the choice of early stage startups pre-funding, as there are tax protections for founders as well as freedom in your operating structure. In addition to limited liability protections, LLCs also offer founders freedom to determine how distributions will be made to investors and how the LLC will be taxed: as C-Corps, S-Corps, or partnerships. For these reasons, an LLC may allow a founder additional opportunities for short and long term planning.
C-Corp: C-Corps, are a structure wherein owners are taxed separately from the entity, commonly referred to as “double taxation.” This is what you most commonly think of when you imagine a corporate structure. Instead of the founder assuming personal liability, the corporation is taxed on its own revenue separately from your personal income tax. Additionally, shareholders aren’t taxed until the corporation distributes funds to them. There can be benefits for taxation upon exit strategy with this structure.
What should you do now to protect your business in the event of death or disability of a key employee?
Business owners often pay lip service to the idea that “our people are our greatest asset.” However, valuing your partners’ and employees’ contribution to the business is not the same as protecting your bottomline from the loss of a key part of your team. Entrepreneurs and founders are often focused on the details of growth and scaling their business, rather than planning for an unforeseen loss. But the reality is that all too often good businesses are derailed by sudden loss of a key part of the team.
Avoid common mistakes experts see business owners making around key employee loss:
- “I think there’s something in our operating agreement about that.”
- As legal, financial planning, and tax experts, we often hear this from founders–and they are often correct! Operating agreements often contain generic language about loss of a key team member, but revisiting this regulatory to ensure it still makes sense for your business is key
- Failing to finance planning measures for key team member loss.
- The other biggest issue founders run into is that there are provisions for navigating a loss in personnel, but their operating agreement calls for a funding source that has never been executed.
- There are often significant costs associated with replacing important team members, which is why many operating agreements call for a “key person policy”. Properly funding the precautions set out in your operating agreement will ensure that your business can access the “life insurance” it may need to navigate the loss of a key team member.
How often should you review your operating agreements around loss of key team members?
Experts at Nemphos Braue recommend that business owners pull out their operating agreement every 24 months at the very least. This gives owners, partners, and family, the opportunity to quickly touch base on current operating procedures, changes that may be necessary, and explore how their thoughts on succession planning may have shifted as the business evolves over a 12 or 24 month period.
To learn more about business succession planning from the experts, watch the rest of the webinar below!
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