Taking Proactive Measures about Liability
In an increasingly litigious society where more personal behavior is recorded every day, business owners have to be very careful what they say and do on and offline. Hiring a competent lawyer or keeping one on retainer for advice and help can be a lifesaver if a complicated situation arises and no one knows how to navigate it. This would include advice about customer interactions, local legalities, product requirements, and tax law as well.
Another way to limit liability is to incorporate. Many businesses operate as sole proprietorships. This may be a flexible way to function as a company, but if the business is sued, the owner’s assets, including his home, can be vulnerable. No one wants to have a business disaster turn into a personal disaster as well. Some businesses incorporate to separate their finances from the owner’s and bypass this threat. The government has different requirements of a corporation, however, in terms of laws, reporting, and taxation, so this is not a solution for every business owner.
Another method of limiting business liability and protecting value is to create a trust and have the trust own the business. A business value protection trust can be created to protect assets from issues that arise both inside and outside of the company.
The Business Value Protection Trust
Limiting liability is only one advantage of a business value protection trust (BVPT). It also functions to protect the interests of all the business owners by ensuring that an exit strategy is in place for all of them. It sets up a smooth transition from one owner to another or others, bypassing any dissent or chaos that might arise without the legalities already in place.
The process of creating a BVPT will include drafting legal documentation such as a buy-sell agreement (BSA) We discussed the importance of creating a buy-sell agreement in a previous blog. Other important documents may include:
- Irrevocable power of attorney for each owner
- A trust deed
- Life insurance for each owner
A BVPT has many benefits. It ensures that all owners agree on what a fair price for a business share or interest is and that the price is stated up front and understood by all parties. It also allows for availability of liquid income to buy out an owner at retirement or due to illness or a death. Due to the terms of the trust, the retiring owner will have the money he needs for his future or his family will have direct access to that money without having to wait for a sale of assets or financing to come through.
A trust guarantees that a smooth transfer of ownership can happen in the event of a death or permanent disability, protecting both the company and the other owners. It stops family members who are not named in the trust from disrupting the business in how it operates and from arguing about the disposal of shares. It also eliminates the possibility of problems with suppliers, creditors, or anxious employees while the company is in the process of a leadership transition.
A business value protection trust places an independent trustee in charge of managing the transfer of the outgoing owner’s interest. This makes it more likely that the transfer will be smooth and fair and that involved parties who are not owners will not cry foul about the disposal of shares and sale proceeds.
A BVPT is complex. It has to be. It requires business owners to plan for the future and make decisions ahead of time with the goal of ensuring fairness for all parties, a peaceful and satisfying transition of leadership, and no disruption of business. When it’s done right, it protects value and ensures that all owners will be satisfied with the outcome of a major transition.
If you are concerned about your company’s vulnerability to common business threats, please call us at Prometis Partners. We would be happy to discuss issues of liability with you and suggest appropriate measures for how you can limit the exposure of your company to risks, including the possibility of a business value protection trust.