Be smart about the early decisions such as when you elect the kind of business you want to be. Shortcuts in the beginning are dangerous. A choice whether to be taxed as a corporation, an S corporation, a partnership or a sole proprietorship is one of the significant choices you make, and is integral to the end result. Exercise some skepticism about your plans. Ask yourself whether you are choosing the right business to pursue and the right partners. As you start to make progress, stay disciplined and constantly exercise care. Manage your business for long-term results. A business that has value also has build a solid legal and ethical foundation for future growth. Keep in mind that selling that business is a distinct possibility, and if you keep the business for a long time, it is just as important, or even more so, to build sustainable value.

Buy-sell Agreements could be a fantastic benefit, although many entrepreneurs have not considered how much they can help.A business with multiple owners can structure a buy-sell agreement among them. A buy-sell provides mechanisms for continuity of the business. Their most well-known aspect may be that they lay out a plan of succession upon one owners’ death. Some buy-sell agreements provide for mandatory repurchase from the deceased owner. Often these buy-sells provide the deceased owner’s family with liquidity. Some mandatory buy-sells are funded with life insurance. Optional buy-sell agreements also deal with deaths, divorce, bankruptcy or disability of an owner, but their purpose is mostly to preserve continuity for the business. Having the right to optionally purchase shares, the continuing owners are often able to retrieve ownership from a person who has lost interest in the business or is developing greater interest in other pursuits. Also, an optional buy-sell provides the continuing owners the power to avoid ownership being transferred to a person with whom they are not comfortable or from whom they receive no contribution of time or effort.

Someday the ownership of a business will change hands. Plan for the day, even if it seems far-off. Sometimes the future owners can be the current employees. This can be a great means for retaining talented people. However, not all of these arrangements continue long-term, and the business wants the ownership to be a long-term incentive. Stock restriction agreements allow business owners to transfer a business interest to a key employee without risking that it might go to waste if the employee departs. The stock restriction agreement provides the business owner with an option to repurchase the shares if the key employee terminates his/her employment. The are “golden handcuffs” that help retain a key employee. The restrictions also can give the business owner the option to avoid being partners with a disgruntled former employee. Very importantly, stock restriction agreements also enhance the ability of the business to protect intellectual property and customers.

Business also needs to recruit and train dedicated and talented people to succeed management when it retires. When management and owners are the same, this tends to get more complicated. Proper succession planning should be done to indicate who will step up when the time comes, and the time to plan succession is a long time before succession takes place. Planning for business succession can facilitate the management transition of your business and avoid unnecessary distractions.

Separately, although sometimes not fully separate, business owners need to consider who will succeed them as owners. Estate planning is interrelated with their business planning. As with business planning,there are big tax and logistical implications–the costs–probate and the estate tax burden–and the risk that a financial future could weigh in the balance. Like all the other planning that must take place, estate planning is a necessity. Estate planning also offers equally great opportunities to—

1. Enhance the long-term value of the business;
2. Enhance the value received by your survivors;
3. Reduce the tax burden;
4. Avoid persons who are not suited or intended to be owners from owning your business;
5. Avoid persons who are not suited to be managers from operating and controlling your business;
6. Avoid delays and costs;
7. Retain key employees; and
8. Ease the other challenges of accomplishing a successful transition

A lack of proper estate planning by a business owner can financially jeopardize both the business the owner’s family. The estate tax creates particular problems for both businesses and families–the business often constitutes a large percentage of the deceased owner’s net worth. The estate tax is a very high percentage of a large estate, and when that happens to be the case, insufficient liquidity is a debilitating hardship. Without proper planning, the estate tax is devastating, and the business and the family members who survive may be forced to sell the business at the worst possible time. A forced sale should be avoided through proper planning.

There is a litany of available options that provide considerable tax savings for the families of business owners, including start-up planning, strategic planning and estate planning.

Trusts

A business interest can be held in trust. This arrangement can serve both non-tax and tax objectives. A living trust can designate who inherits your assets and is preferable to a will. Living trusts have an advantage over wills because, if ownership of your business is titled in the name of the trust, they allow an individual’s estate to avoid probate. Probate is time-consuming and costly. If you die without a will or trust, the intestacy laws will dictate which of your relatives would succeed to all your assets—not necessarily the persons you would have chosen to own and operate your business. A living trust allows you to designate a trustee who will be responsible for managing the trust assets upon your death or incapacity. It may be desirable to name a special trustee to manage the business interest.

Lifetime Transfers

There are often tax advantages in making lifetime transfers. Gifting interests in your business during your lifetime allows you to avoid estate tax on the transferred interest itself and any appreciation n value that occurs after the gift. There are several ways to make lifetime transfers of ownership interests.

Annual Gifts.  One option is to gift small interests in your business each year. Under current tax laws, you can transfer up to the annual exclusion amount (currently $13,000) per gift giver (called a “donor”) per gift recipient (called a “donee”) per year without being subject to U.S. gift tax or utilizing any of your lifetime gifting exemption (currently $5 million). For married individuals, your spouse can also make annual exclusion gifts. Although the annual exclusion amount is relatively small in any given year, depending upon the number of family members receiving ownership interests, over time this strategy can provide significant transfer tax savings. Also, with a gift of a minority interest in a closely held business, the value of the gift can be reduced to account for a minority interest and lack of marketability. This strategy can be especially helpful where considerable appreciation in the value of the business is expected.

Lifetime Gift Exclusion.  Another option is making a gift in excess of the annual exclusion amount. Each individual currently has a $5 million gift tax exemption available for lifetime gifting. This may be reduced to $2 million on January 1, 2013. Thus, gifting larger amounts before the exemption is reduced may be advisable where your estate is large or death is imminently expected.

Sale on Credit.  An additional technique for transferring ownership interests involves selling a portion of the business in exchange for a promissory note.  The note is then repaid over time, often using the dividends or net revenue received from the business. By selling the interest, the owner is able to transfer any future appreciation of the business free of estate or gift tax. Where the sale involves a minority interest in the business, the purchase price is generally reduced to reflect the market value of a minority interest. In addition, because interest rates are at relative lows historically, the purchaser (usually one or more chosen family member(s)) is currently able to finance the purchase on favorable terms. Where desired, the sale may even be structured in a manner that allows the selling owner to defer capital gains on the sale.

GRAT. Another gifting strategy involves the use of a trust known as a grantor retained annuity trust (“GRAT”). A GRAT is an irrevocable trust established by an individual who transfers a portion of his/her business to the trust. The terms of the trust require that the trust pay the individual an annuity over the term of years chosen by the individual. Provided the individual survives the chosen term, the assets remaining in the GRAT pass to the beneficiaries selected by the individual, commonly the individual’s children or a trust for their benefit. The main advantage of a GRAT is that it transfers any appreciation of the business that occurs during the term free of transfer taxes, and often without the use of any lifetime gift exemption. Depending upon the appreciation of the business interest that occurs during the term of the trust, the tax savings can be substantial. GRATs have been particularly successful where the owner anticipates the possibility of a future sale of the business or taking the business public, though planning in advance of such events is required to maximize the effectiveness of such planning.

Although the stimulus bill and the laws in effect before it both restrict government procurement in such a way as to direct funding to products that are Made in America, they do so in different ways. The stimulus bill is a stunning departure from the earlier law, called the Buy American Act, that was adopted in 1933 and was later amended from time to time, both by the Congress and by the President, in a series of Executive Orders. The earlier law restricts government procurement in a way that is neutral concerning whether a manufacturer bought its materials from China or from any other foreign country because all that mattered was that the U.S. content be a majority of the total product cost. But the stimulus bill is different. The stimulus bill provides, as a general rule, that products within its coverage are not permitted to have any foreign content, but also provides an important exception–foreign content is okay as long as it is manufactured in only those foreign countries that are parties to trade agreements with the U.S. and only if those trade agreements prohibit the U.S. from discriminating against that the foreign imports concerning government procurement. NAFTA is such an agreement, so goods or materials made in Canada or Mexico are treated as compliant with the Buy America provision of the stimulus. On the other hand, goods or materials made in China are not compliant. In fact, any small Chinese content of a product would make the product not purchasable for construction financed by the stimulus.

Clients also ask me whether their packaging can read “Made in America.” Although the rules about what the product packaging can say and the rules about the making of product itself are easily confused, they are very different.

For instance one client, who should easily meet the test in the Buy America provisions of the stimulus act and definitely meets the test in the Buy American Act, wonders whether their packaging can state Made in America.  Not necessarily.

The client buys some foreign materials and parts from countries with bilateral trade agreements with the U.S., and then makes all of its products in the US.  Under the stimulus act,  stimulus funds can be used for goods that are made in the USA (or that are treated the same as U.S.-made goods under international trade agreements, for example under NAFTA).  Under the Buy American Act, the US content needs to be at least 50% of the total cost.  But product packaging is regulated by the Federal Trade Commission, and under its guidelines, a Made in USA claim can only be made for those goods with all or substantially U.S. content.  The inconsistency of these laws in causing some confusion.

It should help to remember that government procurement rules do not require the product packaging to read “Made in America” and indeed there are allowances to buy foreign goods under the “Buy American” procurement laws. However, the claims made on packaging are generally aimed at private sector consumers. Therefore, the stricter rules that apply to advertising and labeling are meant to protect consumers from confusion. Until we know definitively how consumers would interpret a label that reads “Buy America,” it would be safest to assume that the consumer would interpret it as meaning “Made in USA.” Made in USA claims are appropriate for only for goods manufactured in substantial part in the U.S. and whose foreign content, measured by relative manufacturing costs, is minimal.