Business Law - Keeping it all in the Family

Business Law - Keeping it all in the Family

By Alan G. Orlowsky

Let's Talk about.............Business Law - and Keeping it all in the Family. 

Vito Corleone had built a vast empire in his 50+ years in the olive oil business. It was important to him that the business remained in the family, and he expected his three sons to take over when he was gone. They were already involved in the business, and quite passionate about it, and each had a defined role. Vito’s wife Mary was a stay-at-home Mom who was never really involved in the business, and knew very little about the day-to-day operations. Vito consulted with his top executive and in-house counsel, Tom Hagen, on ways to ensure the business would pass to the three boys. Tom suggested several ideas for Vito’s consideration.

Many business owners assume that their children will want to carry on the family business, but this is not always the case. So begin with a heart-to-heart discussion. It’s important to understand what the children want and expect. If any of the children are interested in carrying on the business, you’ll need to realistically and objectively assess each child’s qualifications and abilities to do so.

 To have someone in charge of a business who doesn’t have the personality, skills, or knowledge to successfully run the business is unworkable – even if that person is your child! However, the best person to run the business is often not the same person that a family’s dynamics would indicate. It’s not necessarily the oldest child, the “born salesman,” or the daughter with the MBA. Every business is unique, and there are no easy answers in business succession planning.

If your children already work in the business, you can evaluate their performance and their strengths in such areas as marketing, administration, finance, and operations. If a child is interested in the business but not working in the business, you should get them involved as soon as possible. You should provide that child with the necessary experience in the day-to-day operations of the business and general corporate matters. Let that child work his or her way up the ladder in non-management positions, gaining important experience. This will help non-family employees accept that child more readily.

 One of the biggest obstacles in transferring to family is how to ensure that the business will continue to be profitable and growing. Selling or transferring to family has the same problems as transferring internally to employees. The big hurdle is management training. If you have been running the company successfully then you will now need to train family members to do “what you do.” This takes time, often three to five years.

It is helpful to have your business plan outline the steps of the transfer, and establish goals that can be monitored and measured at regular intervals. If enough time is allowed, the training can be carried out in a slow, purposeful, and organized fashion. A multi-step transfer allows you to control the process, and relinquish management duties over time in small pieces.

In addition, as a parent you may be hesitant to face the emotions or even accusations about having a favorite child, or arguments about who is smarter, or better with people, or better with money. It’s easy (and not uncommon) for emotional issues to cloud and confuse the discussion about what is best for the business. Using an outside advisor who specializes in both family and business dynamics allows a more objective input into the decision. Once that decision is made, ensuring that the family members are groomed to be successful becomes equally as difficult to do.

There are several issues to be dealt with in a transfer to family members upon death. First is the obvious problem of the lack of liquidity of a non-spouse survivor, inheriting an illiquid asset with a substantial taxable value. If there are estate taxes to pay, how will the beneficiaries pay them? If a minority owner can’t get along with the other owners, how will the minority owner receive fair value if they try to sell their ownership? The minority owner might be forced to accept less than fair value for their ownership just to get out of the business.

Transfer of a business to unprepared survivors usually causes immediate and obvious problems. Grieving the loss of a loved one while also assuming new responsibilities, can cause panic, exhaustion, family squabbles, and ultimately, failure. Vendors, competitors, and other adverse parties might be able to take advantage of the situation. This is exacerbated if the heirs are not familiar with the business.

Transfer of a business to heirs who have no interest in operating the business will also cause problems. Perhaps some of the heirs don’t want to participate in management, but don’t want to sell their share to the other owners, either. Uninvolved owners can cause friction between other owners, employees, even customers, if they disagree with how the business is being run.

Valuing and selling the interest of those who want to be “bought out” will likely be contentious. The deceased owner won’t be available to provide wisdom and advice. The business may lose value due to the absence of the founder and a subsequent reduction in activity or sales. Buyers will likely know the situation and offer a reduced price. Liquidity issues may grow as time goes by. Inadequate offers may start to look appealing. If the business is unique there may be few potential buyers available to begin with.

There may belegal and tax issues to resolve. There are often valuation disputes with the IRS. They often result in litigation or settlement at higher-than-expected values. Understatement of values can result in estate tax penalties.

Obviously, there is no shortage of problems that might occur. That’s why it is so important to plan well in advance of a transfer. And in many cases, it is advisable to actually carry out the transfers of closely-held business interests prior to death.

If you have questions regarding a Family run business or general Business Law inquires please visit our website at www.orlowskywilson.com or call us today at 847-325-5559.

Business Law - Best Practices when Hiring Freelancers

 Best Practices When Hiring Freelancers
 By: Alan Orlowsky

 Let's Talk about.....Business Law and Hiring Freelancers and how to treat them as independent contractors, so you wont be liable for their payroll and healthcare benefits. These best practices can can apply to new Business Formations, Partnerships or Existing Businesses.




In the 1990's Microsoft Corp. supplemented its workforce by hiring "freelance" computer programers. The freelancers signed agreements when they were hired, stipulating that they would work as independent contractors, receiving cash payments for their services. In the agreement the freelancers also stated that they would be responsible for paying their own social security, unemployment, and workers' compensation taxes.

By Treating those workers as independent contractors, Microsoft believed it could avoid the cost of providing benefits and paying employment taxes. Microsoft made a very costly mistake. The company integrated the freelance programmers into its workforce. They worked on projects with regular employees, under the same supervisors, using the same supplies and equipment, during roughly the same hours, performing similar tasks, and on the company's premises. Microsoft believed that merely executing a formal agreement, in which the freelancers classified themselves as independent contractors would insure the freelancers independent contractor status.

Logo courtesy of http://www.microsoft.com

The IRS on the other hand, believed Microsoft was treating the freelancers as if they were employees. As a result of an IRS action, Microsoft agreed to pay all the freelancers back employment taxed plus penalties. But the company was in for an even bigger shock.

In 2000, the United Court of Appeals, reviewing the case of Vizcaino vs Microsoft, decided that since the freelancers were really employees, Microsoft should have provided them the same benefits that all regular employees enjoyed - including group health insurance and 401 (k) plans. Now Microsoft must pay those freelancers millions of dollars in back benefits.

 Guidelines, not Laws:

The rules for hiring and compensating independant contractors are not precisely defined or uniformly applies. The IRS might view your situation one way, and the National Labor Relations Board or the Wage and Hour Division of the Department of Labor might see it another way. Your State department of revenue might not agree with the Fed.

Although the government does not provide clear, concrete rules for distinguishing freelancers from employment, the guidelines given below can help you when hiring freelancers. Be sure to consult your attorney and your accountant to formulate your hiring policy, and any work contracts, before you engage a freelance newsletter writer, editor or designer.

Control over Work Methods

The most important test of weather a worker qualifies as an independent contractor is how much control he or she has over the methods and means to accomplish the assignment. For Example:

• An Independent Contractor (IC) should be free to decide how, when and where the assignment work is done.
• The IC should use his or her own equipment, transportation and supplies whenever possible.
• The employer should not have to train the IC for the assignment.

Compensation
An IC should be paid by the job, upon submitting an invoice or series of invoices to the employer, and not according to a monthly or yearly salary. At the end of each year the employer should file Form 1099 for each IC who was paid at least $600 during the year.

A Freelancer should run a Real Business
The IC usually has his or her own office that they operate out of, even if it's little more than a desk and a phone in a spare bedroom. If you provide the IC regular desk space on your premises, the IRS might consider that worker your employee. Other considerations include:

• Most Freelance writers, editors and designers make their services available to many publishers in the marketplace. If yours is the only 1099 attached to an IC's income tax return, expect an IRS audit.
• ICs should have the ability to subcontract the work you assign to them, or reassign the work to an assistant who works for the IC.
• Workers are more likely to be considered ICs if they advertise their services, use their own printed business cards and letterhead, carry business insurance and have a separate  business telephone line.

Industry Standards
Some industries - including publishers, professional practitioners, consultants and marketing firms - customarily hire freelance writers and designers more than other industries, and the IRS knows who the are. If your company is any of those fields, you are more likely to convince the IRS that the ICs you hire are really not your employees. If your company reports significantly more IC compensation than is standard in your industry, you'll attract IRS attention.

Contracts
As in the Microsoft case illustrated above, a written contract won't guarantee a worker IC status if all the other factor point to a classification of employee. Getting an IC's signature on a work-for-hire contract will help reinforce your efforts to comply with the rules. At the very least, such a contract should spell our the nature of the assignment, deadlines, compensation and acknowledgement of the worker's IC status. Always check with your attorney for contract laws and business transactions.



If you have questions about this post or about a particular legal situation, please contact Alan Orlowsky by calling 847-325-5559 or visit our website www.orlowskywilson.com.