Surprisingly, the greatest threats to the continuity of a family-owned business are not competition, creditors, or even lawsuits. They are divorce and lack of a succession plan.
The big D
If you get divorced, you could lose up to 50 percent of your business to your ex-spouse.
On the other hand, if you gift or sell a large portion of your business to an adult child within the family, a large portion of the business may be lost.
This results because your former son- or daughter-in-law may end up with half your interest – which could be a controlling interest. As the divorce rate looms around 50 percent, the possibility of this occurring should be anticipated.
We’ve all heard the story of a family business being attacked by the former spouses of elder and younger family members alike. Typically, the family patriarch has gifted substantial family business stock to a child who works in the business.
When there is a divorce, nasty fights can ensue for as much of the child’s share as possible. This situation can tie up the business in protracted litigation and has the potential to seriously disrupt business operations.
Of course, an ante-nuptial (prenuptial) agreement can prevent such a disaster from befalling your family-owned business. Do not let poor asset protection planning cause your business to falter.
Your business planning must include divorce protection for yourself and other family members.
Successful succession plans
A succession plan is as important as an estate plan, which provides for the distribution of your assets after you die.
The abuse of an adequate succession plan has resulted in the distribution of many family-owned businesses after the founders retire.
Approximately two-thirds of all family businesses do not survive to the second generation. Often hurt feelings and infighting result when there is no well- thought-out succession plan.
Other suggestions with respect to the protection of your business include:
Never operate a business or practice as a sole proprietorship. This puts all your personal assets at risk.
Even worse is running a business or practice as a general partnership – you gamble your personal finances on your acts and those of your partners. If you operate as a general partnership, make corporations the partners.
A corporation, LLC or a limited partnership is usually the preferred way to structure a business as you have less risk and exposure. This may also save taxes, probate fees and help you to retain full control.
“Aim for the best. Plan for the worst.” Structure your business as defensively as reasonably practical.
Your business should never directly own valuable assets, like real estate, copyrights, hi-tech equipment, etc.
Mortgages from friendly lenders or suppliers can protect you from hostile creditors and lawsuits.
Bankruptcy can be an effective bargaining chip. However, if it is a real option, do pre-bankruptcy planning with an asset protection specialist.
To substantially reduce taxes, while protecting assets and passing wealth tax-free to the next generation, consider using a VEBA.
Obviously, expert advice is invaluable.
