Save your business by doing these 3 simple things
If you followed my tips from a previous article, you incorporated your business at the right timing so now here are 3 things you should deal with real soon.
1. Get a shareholders’ agreement, seriously though
I won’t go in too many details because I have a whole post on the importance of having this agreement but it is one of the first things you should get your hands on. Your business partner(s) may be your best friend right now but wait until money starts coming in or not. This written agreement states all the shareholders’ rights and obligations. With this, Laura won’t be able to sell her shares to a total stranger who showed a mere interest in your business. If you happen to be a minority shareholder, you might want to make sure you have clauses that cater to you as well. If the majority shareholders want to sell the business, do you have a say in this decision or you are obliged to follow the leader.
2. Were you operating with assets prior to your incorporation?
If you were operating your business as a sole proprietorship and already had equipment and material you have to transfer the assets to your new Inc. What assets are being transferred to your corporation? There are the physical assets (equipment, computers, furniture, etc.) and the intangible assets (goodwill).
What is the goodwill and what’s its value? Goodwill is what someone would pay for your business in addition of the price of the physical assets. Goodwill can be the value of the brand, reputation, supplier list, and loyal customer base. It’s not as easy to quantify the value of goodwill as it is with equipment since it’s an intangible asset.
There are no tax consequences when the transfer of assets is done via a rollover. To avoid any impact, the assets must be transferred at their fair market value.
3. Getting a life-insurance policy
Are you several shareholders running this business? Y’all should consider getting a life-insurance policy or a critical illness insurance, which the company would be the beneficiary of.
Why? Let’s start with the life insurance. If a business partner passes away, their shares will pass to whoever inherits them under his will. The liquidator will administer all the rights that were attributed to his shares. The company will need to buy back those shares and if they’re worth quite a few bucks (I hope for you!), you might not have the liquidity (or funds) to pay for them right away. You certainly don’t want to be stuck with a new shareholder. With the life insurance check, you’ll be able to buy the shares without jeopardizing the company's survival.
As for the critical illness insurance, nowadays you get sick before you die. We tend to only think about the life insurance policy but what if your partner gets so sick that he can no longer be an asset for the company. You might still have to issue dividends to a shareholder who can no longer participate in the growth of the business. With insurance, you’ll be able to give him a lump sum and buy back the shares without having to dip into the company’s funds.
It’s all fun and games until you realize you are not equipped to face the obstacles, whether it’s a shareholder wanting to leave the business or a partner getting sick, don’t get caught up in the midst of things. If you get these 3 things done, you’re already one step ahead.
For more information on how to check these 3 things off your to-do list, email or call us, we'll be happy to help.