Business Entities

The choice of business entity in the context of estate planning and asset protection turns largely on the type and value of the asset to be held by the entity and the relationship of the owner with the intended recipient. In other words, the goal may be to make lifetime gifts of fractional interests to children as an element of a gift tax strategy, or it may be to arrange for a smooth transition of the family business upon the incapacity or death of the owner.

FORMATION OF BUSINESS ENTITIES

Business formation requires the preparation of Articles to incorporate or organize the business by registering the entity with the Virginia State Corporation Commission. As business structures vary greatly, we advise clients as to which type of entity is most likely to achieve their goals. The supporting legal documents typically include Bylaws and stockholder (“buy-sell”) agreements for corporations and Operating Agreements for limited liability companies (including similar terms for transfer of membership interests).

REGISTERED AGENT SERVICES

The statutes governing the formation of a business entity require that a Registered Agent be named in the Articles filed with the State Corporation Commission to serve as the official contact person. The Registered Agent receives official documents, including the annual report and registration fee notice, from the SCC, and is the official agent for service of process for lawsuits and other claims against the entity.

When attorneys serve as Registered Agent, they often provide additional services, including the preparation of minutes of annual meetings of shareholders and directors. It is also common practice to maintain custody of the original corporate minute book, with the records of meetings, elections of officers, stock certificates and the corporate seal, providing confidentiality for company affairs.

BUSINESS SUCCESSION

A thoughtful business owner recognizes the importance of establishing a succession plan. While the bequest of equal shares of the owner’s interests to his heirs seems equitable, it does not ensure prudent management of the company in the next generation, nor does it satisfy heirs who do not wish to be involved. Effective legal counsel will develop alternative inheritance plans to divide the total estate, not by fractions, but by asset class, so that heirs involved in the business will receive at least a majority interest.

Where the business is co-owned with others who are not family members, the estate planning goal shifts to the preservation of the value of one’s interest upon death. A common technique is an agreement among the owners as to the terms governing the purchase of the deceased owner’s shares by the survivors. Also known as the “buy-sell” agreement, these contracts provide for predictable terms, a formula for future pricing of interests (some using life insurance for purchase funds), and limitations on the transfer of interests to unwanted partners. Skillfully drafted buy-sell agreements can ensure a smooth transition of the decedent’s ownership interest and avoid many of the pitfalls leading families into litigation with the remaining owners.