The Importance of Buy-Sell Agreements in Closely Held Businesses

Why are buy-sell agreements so important in closely held businesses?

When you go into business with someone else or buy stock you are always doing so from an optimistic perspective. You wouldn’t be buying in and putting your time or money on the line if you thought things were likely to go south, or even sideways on you. But they do.

A ‘buy-sell’ or shareholders agreement governs how stock is traded, and in this case specifically the sale of shares to outside parties. It lays out when stock can be sold, who to, the rules of selling that stock, and often how much for.

This is particularly important in a closely held business. According to Pew Research there are a lot more closely held businesses than most think. In fact, despite what the name some of these are very large corporations with tens of thousands of employees. Pew Research identifies some of these as family owned firms like Cargill which has 140k employees, and had revenues of almost $140B as of 2013. Hobby Lobby which is another multi-billion dollar firm and is ranked on Forbes has around 23,000 employees. There are also over 4 million S Corporations which may also be considered closely held companies. So these companies run from very small family businesses and partnerships to massive global entities. The current surge in real estate crowdfunding and other structures under the JOBS Act could fuel the birth of many more organizations in this category. Note that according to the IRS the official definition of a closely held corporation is one which has 50% or more of its outstanding stock owned by 5 or less individuals, and is not a personal service corporation.

With so few shareholders and ownership and control is dramatically more important than in a massive publicly traded corporation that many have thousands of small stakeholders. This means the impact of a single party can significantly change the company, its direction, performance, and value, as well as the value of shares.

Factors that can have heavy negative influence potential here can include disagreements between owners, disability, mental incapacity due to age or substance abuse, or death. If a large portion of shares are transferred who knows what that person will do with that control? They could resell them, hurt operations, devalue the company, and wipe out other shareholders yields and wealth. The buy-sell agreement is instrumental here to regulate how shares can be transferred, even in the case of death. Sometimes this will include specific share price calculations, first right of refusal to purchase shares by existing owners, etc. Just know that it is always easier when a written legal framework is in place, and one which was created when things were amicable and objective.

Authored by Titanium Asset Protection

Titanium Asset Protection is an elite asset protection firm with licensed California attorneys on staff who specialize in asset protection, trusts, corporate law, succession planning, bankruptcy, real estate, and tax law. Our team has successfully represented clients to the highest levels of the justice system in fighting to protect them, and their finances, with lead counsel Matt serving as the Ethics Chairman for Le Tip International, The Chapter of Orange for 15 years, being an honored member of the revered Wealth Counsel.

 

The Big Perks of Owning Real Estate in an LLC

LLC Benefits

What are the real advantages of owning real estate in a limited liability company? What common blunders could cost investors big time?

Bizadvisor.com proclaims “the limited liability is the top choice for real property.” A review of recorded real estate transactions from Property Shark by the wealthiest and most sophisticated investors and funds in hot Manhattan over the last year show LLCs almost exclusively used for taking ownership. So why are these legal structures and investment vehicles so popular with savvy investors? What are the real pros and cons?

The Advantages of Investing in Real Estate with an LLC

The most popular benefits of using LLCs in real estate investing include…

Privacy

The security conscious and those desiring anonymity from frivolous and malicious lawsuits prize vehicles like these as an extra layer of privacy.

Limited Liability

Chief Strategist of Breakwater Equity Partners, Jack Rose, says “One major advantage of an LLC over a partnership is that the liability of the members of an LLC can be limited to their financial investment,” and “so if the worst happens, the most the owners can lose are the assets being held by the LLC.”

Lack of Double Taxation

Limited liability companies offer lack of double taxation which can be a big issue that takes a large bite out of revenues and returns when using other entities.

Flexibility

LLCs can provide members and investors far more flexibility in operations and structure than some other types of legal entity.

Reduced Paperwork and Time Burden

Some legal structures require regular board meetings and the recording of minutes. Burdens like these can expose investors to risk if they fail to stay on top of them. Or may eat away at time and resources if they do.

3 LLC Pitfalls to Watch Out for

1. Filing Reports

Original applications and annual renewal fees must be kept up with in order to enjoy seamless operations and ongoing coverage. In some states an LLC can be filed online, in 5 minutes or less, for just around $100. However, with anything this important it is crucial to obtain professional legal advice, personalized advice on your unique individual circumstances, and ensure paperwork is completed and filed flawlessly.

2. Timing

One of the most significant mistakes real estate investors make is putting off registering a LLC until late in the game. Transferring an owned property to an LLC or especially an IRA LLC can potentially trigger substantial tax consequences.

3. Piercing the Corporate Veil

As with any corporate structure it is vital for investors to avoid any activities which could allow for exposure to piercing the corporate veil. Activities such as comingling funds could result in the failure of the LLC to maintain its protections in court.

Summary

LLCs have many advantages. Used well they can be invaluable. Used poorly they can increase liability. Consult a professional and find out if a LLC is right for you and your strategy, and look out for the June 2016 presentation on Asset Protection at the top ranked West Coast real estate investors club 12 Rounds.

Authored by Titanium Asset Protection

Titanium Asset Protection is an elite asset protection firm with licensed California attorneys on staff who specialize in asset protection, trusts, corporate law, succession planning, bankruptcy, real estate, and tax law. Our team has successfully represented clients to the highest levels of the justice system in fighting to protect them, and their finances, with lead counsel Matt serving as the Ethics Chairman for Le Tip International, The Chapter of Orange for 15 years, being an honored member of the revered Wealth Counsel.

TAX DUE DATES 2015

2015 California Tax Due dates

Have you filled your taxes for 2014? check out the 2015 Federal Due Dates and don’t miss you deadline. At-least apply get an extension and save your self some time.

Tax Calendar 2015 Federal Due Dates

Corporations

March 16

File a 2014 calendar year income tax return (Form 1120) and pay any tax due. If you want an automatic 6-month extension of time to file the return, file Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns, and deposit what you estimate you owe.

April 15

Deposit the first installment of estimated income tax for 2015. A worksheet, Form 1120-W, Estimated Tax for Corporations, is available to help you estimate your tax for the year.

June 15

Deposit the second installment of estimated income tax for 2015. A worksheet, Form 1120-W, is available to help you estimate your tax for the year.

September 15

File a 2014 calendar year income tax return (Form 1120) and pay any tax, interest, and penalties due. This due date applies only if you timely requested an automatic 6-month extension. Otherwise, see March 17.

Deposit the third installment of estimated income tax for 2015. A worksheet, Form 1120-W, is available to help you estimate your tax for the year.

December 15

Deposit the fourth installment of estimated income tax for 2015. A worksheet, Form 1120-W, is available to help you estimate your tax for the year.