After decades of successfully running your business, you clearly have a recipe for success. Eventually, though, it will be time to pass your business on to the next generation of leadership.
It takes years of hard work, a lot of communication, and a little luck to pass on your closely held business to your kids and have it survive the transition. Assuming your kids want to take over the company, they might not have the same level of involvement or day-to-day management as you did. In fact, that’s just how most transactions shake out. Before you officially pass the torch, make sure your corporation’s Bylaws or LLC’s Operating Agreement, and other internal documents, reflect the new reality.
Example: You are the CEO of and own a controlling interest in your auto repair business. As you approach retirement age, you confirm a (welcome) longstanding suspicion that your two children want to continue running the company. Before you pass on your ownership interests to the two new owners, make sure the Bylaws are updated to reflect the new ownership structure, and ensure that you cannot be ousted from your business by your children, or another third party, after passing on ownership interests to your children. If you are also relinquishing your CEO title, make sure to optimize the procedures for choosing officers, and gradually give your children more control and leadership so they can learn on the job.
What if your daughter wants to be involved in the day-to-day operations but your son only wants to be a passive owner? Pay attention to the Bylaws and how the board of directors, officers, and others will be appointed for the company. You will want to ensure that the people you want to run the company will have the ability to stay in control, and not be overtaken by passive investors.
Besides setting up your children (and, by extension, the company) to fail, you will want to sign a Buy-Sell Agreement prior to giving ownership to your children. This will ensure your company remains a “family company” – prohibiting third parties and possibly spouses from being owners of the company.
You will also want to update your Trust and Will to ensure that those children who you want to take over the business do, and in the proportions you want (again, to ensure future success of the company). If you want some children to take over the company, and others to no, but want there to be an equal distribution, this will need to be done carefully.
Before You Update the Bylaws
It’s well worth going over other internal documents to make sure the next owner and officers are inheriting a well-oiled machine. Eliminate any uncertainties with financial records. Make sure the officers can be appointed in accordance with the future owners’ wishes. Confirm the contact information for any registered agents. Consider getting an up-to-date valuation of the business.
Also, ensure that regular meetings are held and that the procedures for calling special meetings are clear and concise. Corporations in California are required to hold annual meetings of shareholders and board of directors to conduct essential business. An alternative to holding these annual meetings is obtaining unanimous written consent of all voting shareholders.
Passing on your business to the next generation is certainly a bittersweet moment. With the proper amount of due diligence, you can set up your company for decades of future success. However, things will have to change with your company’s internal documents. The tips provided in this blog are meant to serve as a starting point; for comprehensive and effective business succession and estate planning, you need the attention of a skilled legal team.
Attorney Tyler Q. Dahl focuses on helping business owners achieve their goals. Attorney Dahl is one of fewer than 1000 attorneys nationwide who is also a Certified Tax Coach. Contact our team today to learn more about how we can help you, your family, and your business.
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