Small Business Saturday – How to Avoid an Epic Fail of a Business Succession Plan

For the business owner, the success of their business impacts their daily lives. The success of their succession plans (say that five times fast!) is inexorably linked to having a well-conceived and properly prepared plan, that is coordinated with their estate plan. Both plans need to be built to withstand challenges, which are outlined in the article “Five events that can ruin a succession plan” from Kenosha News.

Let’s take a closer look at the “Five D’s of Succession Planning.”

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Small Business Saturday – Important Upcoming Compliance Deadlines for Your Business

Busy small business owners have many tasks on their plates: A significant one is staying on top of important tax and filing deadlines. These important dates may vary depending upon the business’ structure. Here are some of the most critical deadlines business owners may need to meet over the next few months.

Federal tax deadlines

  • September 16, 2019 is the extension deadline for partnerships and S corporations to file their income tax returns. It is also the deadline for third-quarter estimated tax payments if you are a self-employed individual or have substantial non-wage income.
  • October 15, 2019 is the extension deadline for C corporations, sole proprietors, and individuals to file income tax returns.
  • November 15, 2019 is the extension deadline for tax-exempt organizations to file income tax returns.
  • December 31, 2019 is the deadline for 401(k) contributions for yourself or your employees. For the contributions to count for 2019, the account must be created and funded by December 31st.
  • January 15, 2020 is the deadline for fourth-quarter estimated tax payments for self-employed individuals or those with substantial non-wage income.
  • January 30, 2020 is the deadline to file Form 1099-MISC if you have non-employee (independent contractor) compensation to report. However, for all other reported payments, the deadline is February 28, 2020, and if you file electronically, the deadline is March 30, 2020.

Note: State taxes are typically—though not always—due at the same time as federal taxes. A few states allow state tax returns to be filed a couple of weeks (or in the case of Louisiana, a month) later than the federal returns. It is essential to be aware of potentially different deadlines for state estimated tax payments as well.

State filing deadlines

It is important not to forget state annual or biennial filing requirements, though these deadlines will vary depending upon the state and your business structure. Most states—though not all—require either an annual or biennial report or statement to be filed, typically either on the anniversary of the date you formed your business or on a specific date mandated by state law. These types of reports are frequently required for business entities such as corporations, limited liability companies (LLCs), and limited partnerships. They are often accompanied by filing fees that must be paid by the same deadline. If you file your report late, there may be a late fee, and failing to file at all could result in the administrative dissolution of your company, as well as the loss of the liability shield provided by the business entity.

There may also be a state franchise tax imposed on business entities such as LLCs, limited partnerships, or corporations. This tax, which varies from state to state, is often due at the same time as the annual report—either on the anniversary date of the formation of the business or a date specified by state law. The due date may also vary depending upon the type of business entity.

Sales tax deadlines

The deadlines for filing and paying sales taxes vary depending upon the state (you must pay a sales tax in states in which your business has a tax nexus, that is, a sufficient connection or degree of business activity, which may include online sales) and often on the volume of your sales. They may be due monthly, quarterly, or annually, depending upon the state.

Local, state, and federal licenses and permits

If your business is required to obtain any licenses, permits, or certificates from the federal, state, or local government, they may need to be renewed periodically. The renewal requirements and deadlines for your licenses or permits will vary, and it is important not to let them expire. Failing to renew your licenses and permits could result in fines, notices, or even the closure of your business. 

Contact Us for Help

Many small business owners are completely immersed in the day-to-day operations of their businesses and have trouble finding the time to stay on top of the filing deadlines they must meet to avoid fines, penalties, interest, or worse. If you have questions about the deadlines applicable to your business, we can help.

Call us (228) 460-5243 or email us at info@perklawgroup.com to find our how your business planning attorney can help you.

Legal disclaimer: The information in this article is provided for information purposes only and should not be construed as legal advice. Your should not act or refrain from acting on the basis of any content included in this article or on our website (www.perklawgroup.com) without seeking legal or professional advice.

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Small Business Saturday – When Should You Use a Stay Bonus Agreement?

Do you have certain key employees who help make your family business a success? Keeping those employees may be essential to a successful transition of ownership and management to your children or another new owner when you retire or pass away. A “stay bonus” (also called a retention bonus) is a strategy that is frequently used by large companies during mergers and acquisitions but can also be used to facilitate a smooth transfer of small family businesses to the next generation or to new owners.

What Is a Stay Bonus Agreement?

A stay bonus agreement is a contract between the business and a key employee providing that the employee will not leave the company for a specified period of time after a particular triggering event, for example, the death of the business owner. At the end of that period, the key employee will receive a bonus. The amount of the stay bonus could increase over time: The longer the employee stays, the larger the bonus will be.

Why Is a Stay Bonus Necessary?

According to the 2019 PricewaterhouseCoopers Family Business Survey, 62% of business owners plan to pass the business on to the next generation. However, only about 18% have a formal, documented plan in place to achieve this transition. This is likely one of the main reasons why only 30% of family businesses survive the transition to the second generation.

A stay bonus can be a vital part of a business’s succession plan because retaining key employees may be a determining factor in whether the business succeeds or fails during and after a transition. The expertise and experience of essential personnel are especially necessary if the transition occurs as a result of the sudden death of a business owner, which could cause a transfer to occur earlier than expected.

A stay bonus can help:

  • Retain talented people who are essential to the successful day-to-day operations of the business. If you have personnel, like managers or salespeople, who add a lot of value to your business, offering them a stay bonus can provide them with enough financial security to persuade them to stay during and after the transition, particularly if they are concerned that their future with the company may be in jeopardy.
  • Preserve relationships with customers or clients. If your salespeople have long-term relationships with your customers, they could take those customers with them if they leave. Similarly, the loss of other important employees possessing extensive knowledge about your business and its operations could leave a substantial vacuum that could endanger the future of the company. This could be especially damaging if they go to work for a competitor.
  • Prevent the interruption of critical functions. Retaining key employees will provide continuity, which is essential for avoiding disruption in the services offered to customers and for ensuring adequate cash flow for the business.

How Are Stay Bonuses Funded?

There are a variety of strategies for funding stay bonuses. Often, business owners plan to provide funding for stay bonuses by purchasing a life insurance policy with the business as the beneficiary. Then, upon the owner’s death, the death benefits from the life insurance policy can be used to fund the stay bonuses for key employees. Another strategy is to purchase life insurance on the key employees whose cash value could be used to pay for the stay bonuses.

Call Us Today

If you want your business to survive after you leave—whether your departure is because of retirement, illness, or death—it is important to develop a plan to retain your key employees during the transition period. A stay bonus is an incentive that could persuade them to remain with your company, increasing the likelihood of its continued success. We can help you develop a business succession plan, including stay bonus agreements for your essential personnel, tailored to your particular circumstances. Please contact us at (228) 460-5243 or email us at info@perklawgroup.com to find our how your business planning attorney can help you.

Legal disclaimer: The information in this article is provided for information purposes only and should not be construed as legal advice. Your should not act or refrain from acting on the basis of any content included in this article or on our website (www.perklwagroup.com) without seeking legal or professional advice.

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Small Business Saturday – 6 Key Considerations for Passing Down a Family Business

You have spent years building your small business, but have you taken time to consider what will happen to it when you retire, become disabled, or pass away? Although it is often hard to fathom an event that may not occur for many years, it is important to put plans in place in advance. The failure to do so could result in the eventual loss of the business. There are several factors you should keep in mind in making plans for the future of your small business.

  1. Identify a successor(s). Many small business owners plan to transfer their business to a child or children, or sometimes, grandchildren eventually. If you have more than one child, it is important to consider which of them has an interest in stepping into your shoes, as well as whether that child has the skills needed to do so successfully. It is important not to assume that just because one child is the oldest, control of the business will go to that child. The continued success of the company requires that the member(s) of the next generation who will take over the reins have the business acumen and commitment needed to run it.
  2. Consider having the next generation participate in the business before transferring ownership and management duties. For the continued success of the business, your successor(s) should be trained to run the business before your departure. This training can be accomplished over several years, after which you can start the process of transferring management and ownership of the business. Many business owners transfer management control of the business to the next generation first, while staying involved to a limited extent as an advisor, and then, shifting ownership.
  3. Decide whether to transfer the business by a gift or a sale. Although each family must make its own decision about how the transfer should occur, many business succession professionals recommend that the next generation have an economic stake in the success of the business by purchasing at least part of their ownership interest. If your successor does not have the funds to pay a lump sum for the business, the sale can occur as a buyout that happens over the next several years. Alternatively, the next generation can work for the company at a reduced salary to earn their ownership interest in the business. There are several ways the transfer can take place. As business law attorneys, we can help you decide which option is the best one for your particular circumstances.
  4. If more than one child is well-suited to run the business, put a business structure in place that enable the smooth transition to multiple successors with minimal conflict. This transition can be accomplished by incorporating provisions facilitating a smooth transfer into your partnership agreement or LLC operating agreement, for example. If one or more children are not interested in participating in the ownership of the business, consider providing an inheritance for them from other assets or making them the beneficiary of a life insurance policy.
  5. Think about your own needs for your retirement. If you will need a continuous stream of income, consider continuing to play a limited ongoing role in the company for which you receive a salary. Another option is to require the next generation to purchase the business, providing funds for your retirement needs in that way.
  6. Plan with an eye toward minimizing your tax liability. For example, one option is to transfer the business gradually by making gifts of shares in the business each year that are equivalent to the amount of the annual exclusion (currently, $15,000). We can help you accomplish the transfer of your business in a way that minimizes your income, gift, and estate tax liability.

Conclusion

You have invested a lot in making your business a success, and it is hard to think about relinquishing ownership or control of it. Nevertheless, planning is critical in creating a lasting legacy for your family. We can help you put a plan in place that helps you successfully pass your business on to the next generation and ensures that you have a financially secure retirement. Call us (228) 460-5243 or email us at info@perklawgroup.com to find our how your business planning attorney can help you.

Legal disclaimer: The information in this article is provided for information purposes only and should not be construed as legal advice. Your should not act or refrain from acting on the basis of any content included in this article or on our website (www.perklawgroup.com) without seeking legal or professional advice.

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Small Business Saturday – What Small Business Owners Should Know about Business Credit

For a small business to grow, it is often necessary to borrow money. In fact, the Small Business Administration reports that the inability to obtain funding is one of the main obstacles that prevents small businesses from expanding their operations. To increase your business’s chances of obtaining much-needed funding, it is important to understand and establish business credit.

What is Business Credit?

Most people know that each individual has a personal credit score that helps lenders decide how likely a person is to repay a loan. Lenders use that score to determine whether to provide a person with financing—auto loans, home mortgages, or lines of credit—as well as the terms for such financing. However, many small business owners do not know that their businesses can establish a separate credit score—and that there are benefits to doing so.

What Are the Benefits?

According to the Small Business Administration, nearly half of small businesses use personal credit cards for business expenses. However, separating your personal credit from your business can protect your personal credit score in the event your business encounters difficulties in repaying a loan. Likewise, if your personal credit score is low, building a good business credit history for your company can be beneficial, opening up more opportunities for financing, as well as for obtaining better interest rates and repayment terms.

How Can It Be Established?

For businesses like sole proprietorships, which are not legally separate from their owners, it is more difficult to establish a separation between business and personal credit. However, it is not impossible to build separate business credit. The following steps can help your business build a separate credit score:

  • Obtain an employer identification number (EIN) from the Internal Revenue Service. Some business forms, like sole proprietorships and single-member LLCs, are seldom required to get an EIN for tax purposes, but must obtain one for building separate business credit. Multi-member limited liability companies (LLCs), partnerships, and corporations, on the other hand, are already required to obtain an EIN by the IRS. This number acts like a business’s Social Security number and is used by business credit bureaus to identify your business and track its credit history.
  • Open a business checking account to pay for the business’s expenses and employees’ wages. This is required for businesses that are legally separate from their owners, such as LLCs or corporations, but can also be helpful for sole proprietorships in building business credit.
  • Obtain a business credit card using your business’s EIN. It is likely you will also have to provide your personal Social Security number, but the EIN will enable business credit bureaus to track prompt payments to establish a business credit score that is separate from your personal credit score.
  • Establish accounts with companies who will sell products to your small business on credit. Make sure that you consistently pay the bills on time. Ask them to report your business’s prompt payments to business credit bureaus and to provide positive credit references.
  • Contact business credit bureaus to register your small business. The credit bureaus can then open a business credit file for your company.
  • If you are currently operating a sole proprietorship, consider forming an LLC or corporation, which are legal entities that are separate from their owners. This will enable you to establish a clear delineation between your personal and business credit.

We Can Help

It is generally advisable to separate your business and personal affairs. As business law attorneys, we can help you structure your business in a way that optimizes your opportunities to build excellent business credit, separate from your personal credit, as well as guide you in the many aspects of your business planning. Call us at (228) 460-5243 or email us at info@perklawgroup.com to find our how your business planning attorney can help you.

Legal disclaimer: The information in this article is provided for information purposes only and should not be construed as legal advice. Your should not act or refrain from acting on the basis of any content included in this article or on our website (www.perklawgroup.com) without seeking legal or professional advice.

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Small Business Saturday – Can Your Small Business Write Off Bad Debts

Despite your best efforts to work only with customers or clients you believe will pay for the goods or services your business provides and to diligently collect delinquent amounts owed, you will almost inevitably have to deal with bad debts on occasion. In some circumstances, the IRS allows you to take a bad debt deduction.

What Is Considered a Business Bad Debt?

According to the IRS, a business bad debt is considered a loss incurred from the worthlessness of a debt that was created or acquired in a trade or business or was “closely related” to your trade or business when it became partly or completely worthless. If your primary motive for incurring the debt was related to the business, the IRS will consider the debt to be closely related to the business.

The IRS provides the following examples of bad business debts: (1) loans to clients, suppliers, distributors, and employees, (2) credit sales to customers, or (3) business loan guarantees. For small businesses, the most common bad debt arises from credit sales to customers.

If the circumstances indicate that your business has no reasonable expectation that the debt will be repaid, it will be considered worthless. Depending upon the relevant facts, this could be on the date the debt is due or even prior to that date.

You must be able to demonstrate that you have made a reasonable effort to collect what is owed to your business prior to being eligible for the deduction. What is considered “reasonable” will vary depending upon the type of business in which you are engaged. It is unnecessary to sue the customer if you can show that a judgment would be uncollectible. For example, if the customer has filed for bankruptcy, this is sufficient to demonstrate that your debt is uncollectible and therefore worthless (assuming it is an unsecured debt).

Your Accounting Method Matters

If your small business uses the cash method of accounting, which is often preferred because it is less complicated than the accrual method, you report income during the year it is actually received. Because you have not reported amounts you merely expect to receive, but only those you have actually received, you cannot receive a tax deduction based on a bad business debt. Only businesses that use the accrual method of accounting—which reports income in the year earned despite not having been received—have the right to claim a deduction based upon a bad debt. This is because under the accrual method, a business never actually received the income reported to the IRS as a result of the customer’s failure to pay for the goods or services provided by the business. This does not provide an unfair advantage to businesses using the accrual method. Rather, it simply ensures that those businesses are not paying taxes on income reported but never actually received.

Note: The deduction is available only in the year the debt becomes worthless.

Contact Us Today

If your small business has suffered losses because of bad debts, and you are wondering if you may be entitled to write them off, we can help you navigate the applicable tax rules to minimize your tax liability, as well as provide guidance about steps you can take to avoid losses from bad debts. Please give us a call to set up a meeting.

Call us (228) 460-5243 or email us at info@perklawgroup.com to find our how your estate planning attorney can help you.

Legal disclaimer: The information in this article is provided for information purposes only and should not be construed as legal advice. Your should not act or refrain from acting on the basis of any content included in this article or on our website (www.perklawgroup.com) without seeking legal or professional advice.

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Small Business Saturday – What You Need to Know About Non-Compete Agreements for Your Employees

A small business that has invested substantial resources in developing a product or a customer base could be devastated if its employees then go to work for a competitor down the street or set up their own competing business. A noncompetition agreement is an important tool that could protect your business from former employees who could otherwise reveal or use your sensitive information, trade secrets, strategies, or customer information for the benefit of a competitor. These agreements are not favored by the courts, however, because they place a restriction on workers’ ability to freely earn a living (and a few states refuse to enforce them at all). If you choose to require a non-compete agreement for employees, it is important to keep the following factors in mind.

1) Your business must have a legitimate, good faith reason for the non-compete agreement. As mentioned above, if your business has trade secrets or other information that is a valuable asset needing protection, a non-compete agreement is more likely to be enforced by a court. On the contrary, if an employee does not have access to valuable or sensitive information, a non-compete agreement is likely to be seen as merely punishment for leaving your business. In those circumstances, it is unlikely to be enforceable. Be careful about which employees you ask to sign non-compete agreements. A receptionist at the front desk is less likely to have confidential business information than a key manager, so a non-compete agreement precluding the receptionist from working for a competitor probably would not be considered a justifiable restriction.

2) The non-compete agreement must be reasonable. Different states have varying standards about what restrictions will be considered “reasonable.” What is seen as reasonable will also vary based on the type of job the employee held, as well as the type of business. You should err on the side of the minimum duration needed to protect your business. A lifetime restriction is almost never enforceable, but a one-year restriction may be deemed reasonable, for example, for an employee who has had access to your customer information. The non-compete agreement also should only cover the geographic region in which your business operates. A restriction covering the entire state will be considered unreasonable if your business only provides services or goods in one county. In addition, the non-compete agreement must not restrict an employee from performing a completely different job for a competitor. If your salesperson takes a job as an interior designer for a competitor, he or she is less likely to use “insider” information gained while employed by your company against you in the new position because the duties performed will be quite different.

3) Provide a benefit to the employee to compensate for the restriction. If you require a new employee to sign a non-compete agreement as a condition for hiring that employee, the employee is receiving the benefit of a job with your business. However, if you require someone who is already employed by your company to sign a non-compete agreement, it is important to provide an additional benefit, such as a raise, to increase the likelihood that the agreement will be enforceable.

4) Weigh the pros and cons. Although non-compete agreements do protect your business’s trade secrets, sensitive information, customers and more from being disclosed to a competing business, they may also discourage some potential employees from accepting a job with you or prompt existing employees to leave rather than sign the agreement. Along with the concerns about their enforceability, this is another reason to impose only the minimum restrictions needed to protect your business.

Give Us a Call
A non-competition agreement should be customized and carefully drafted to meet the needs of your particular business. We can help you determine which restrictions are legitimate and reasonable to decrease its vulnerability to a legal challenge. Give us a call at (228) 202-2490 to set up a meeting to discuss this and any other employment-related concerns.

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Business Owners Need Estate Plan and a Succession Plan

Business owners get so caught up in working in their business, that they don’t take the time to consider their future—and that of the business—when sometime in the future they’ll want to retire. Many business owners insist they’ll never retire, but that time does eventually come. The question The Gardner News article asks of business owners is this: “Do you have a business succession strategy?”

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Announcing a New Blog Feature: Small Business Saturday

We are proud to announce a new weekly blog post dedicated to small business owners. These posts will address issues such as hiring employees, business succession, the relationship between estate planning and business planning, protecting your personal assets from business creditors….and much more!

Stay tuned for this new series starting this Saturday, July 13.

Let us know what you would like us to blog about in the comments.

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Self Employed People Get to Retire Too–If they Plan Well

People who work for companies have access to perks like 401(k) plans, with automatic deductions that let them put retirement savings on autopilot. However, when you work for yourself, it’s all up to you, says Zing! in the aptly-titled article “Saving for Retirement When You’re Self-Employed? It Takes Planning and Commitment.” If you have the discipline and self-motivation to run a business, you should be able to apply those skills to your retirement.

Here are some tips for self-employed people who are concerned with building their retirement savings.

Embrace a budget. One of the biggest challenges is income that fluctuates. It’s hard to save when one month has you earning $10,000 and $3,000 the next month. You’ll need to create a budget and stick with it, including budgeting a percentage of your income for retirement. While you’re creating a budget, set goals for short- and long-term objectives to keep your budgeting focused.

A budget should include necessary expenses for each month, including mortgage or rent, car loans and credit card payments. Include groceries, transportation, and health care costs. Some self-employed people pay for some items like transportation or entertainment out of their business accounts. If you do that, just work with one budget, so you can measure spending. There is no need to split things out for yourself. You should then look at discretionary items like vacations, entertainment, gym memberships, clothing and things that are not basic necessities.

Now see what’s left at the end of the month. If there’s no regular stream of money going into retirement savings because there’s not enough after spending, you may need to make some changes.

Create an item in your expense budget for retirement savings. Make it automatic. Set a fixed amount of your income, by dollar amount or percentage of monthly income, and put it away every month for your retirement. This takes discipline at first and then becomes a habit. Once you see how the account grows, you’ll be more inclined to continue.

Talk with your accountant about the best savings vehicle for you. Some self-employed individuals use a “solo” 401(k) account, known as a SEP or Self-Employed 401(k). Designed for employers who have no employees other than themselves (or their spouses), it offers the same benefits as traditional 401(k)s. In 2019, you can contribute up to $19,000 when contributing as an employee, or up to $24,500 if you are 50 and older. As an employer, you can contribute up to 25% of your compensation – not counting catch-up contributions for those 50 and older, you can go as high as $55,000 in 2019.

Another factor if you are self-employed is your estate plan. Entrepreneurs are often so busy working on their business, that they forget about the legal side of their personal lives. You need a will, power of attorney, health care power of attorney and, depending on your business and life situation, a succession plan.

Reference: Zing! (Jan. 7, 2019) “Saving for Retirement When You’re Self-Employed? It Takes Planning and Commitment”

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