There are a few topics and discussions most business partners and key personnel will either take years to discuss or, far too often, never discuss. The experienced business law attorneys at Handelin Law know the ins and outs of business formation, management, maintenance, and transactions. Because of the extensive and wide-ranging experience, Handelin Law’s business law lawyers are well suited to assist with and guide those “tough” discussions. Here are the top three “must-have” discussions with your business partners and key personnel before it is too late.
What happens if one of you dies or becomes incapacitated?
Death or incapacity can completely upturn a business unless the situation is addressed beforehand. Establishing, in writing, what you and your business partner or key personnel intend to happen in either scenario will help your business continue to run and serve your customers. While these issues are easily avoided, providing clarity for your business, and loved ones must take priority. Depending on the business structure, this written protocol may be established in the governing documents or a separate buy/sell agreement, and oftentimes replicated or addressed in the principals’ respective estate plans to avoid any unnecessary conflicts. When the time is right, and you are ready to discuss this with your business partner, call Handelin Law to set up a consultation. When thinking of what you would want to happen in the event of incapacity or death, keeping in mind, the end game to an efficient succession plan for your business and a clear path for your loved ones will be one of the best planning decisions for your company. Depending on your unique situation, you may consider:
- Liquidate the business or the business assets
- Buy out heir’s share either through structured payments or through insurance
- Take on heirs or key personnel as associates or career path
Each choice has its own pros and cons, but not having an agreement in place is no plan at all and is a recipe for costly litigation and certain disruption to your business. For these and many more reasons, it is important to sit down with one of our business law attorneys at Handelin Law to ensure you are both making the right choice for your company and loved ones.
- Is your business properly insured?
In the event of an emergency such as lawsuits, natural disasters, death, disability, injuries, etc. it is vital that your business is covered. Here are just a few types of insurance policies you and your business partner need to discuss: workers’ compensation, business interruption insurance, business partnership life insurance, directors and officers (D&O) insurance, disability insurance, and renters or property insurance.
Workers’ compensation, oftentimes referred to as industrial insurance, is mandatory for employers in Nevada and California. Principals of the company can opt-out of workers’ compensation in many situations, but as with all insurance, it is vital if it ever becomes necessary. Some companies attempt to avoid this requirement by classifying works as independent contractors as opposed to employees. This strategy has many pitfalls, and simply may not be applicable to your business’ situation.
Business Interruption Insurance
With recent events dealing with the COVID-19 pandemic, now is the perfect time to consider business interruption insurance. Business interruption insurance is meant to protect against unforeseen circumstances out of your control. Landlords occasionally require this type of insurance to ensure that the lease payments will continue to be made in the event your operations are interrupted. If your business did not have interruption insurance during this event, you and your business partner should consider whether investing in this type of insurance is prudent for your future.
Buy/Sell Agreement funded with Life Insurance or Business Partnership Life Insurance
Buy/Sell Agreements are valuable tools that business owners can use to direct the succession of their business with minimal impact and expense. In insurance terms, this scenario is often called Business Partnership Life Insurance, which is intended to relieve the burden on the business and principals in case of sudden death or incapacitation of a business partner. Business partnership life insurance will tie into discussion point number one “What happens if one of you die or become incapacitated?”. These policies can provide a cash infusion to the business when you or your partner are not able to contribute in other ways because of incapacity or death or provide for the deceased partner’s heirs while giving the surviving principals outright ownership at predetermined values.
Directors and Officers Insurance
If an officer or director were to be sued for wrongful acts, this insurance will oftentimes provide the defense of the company and directors and officers to either defray the costs or to pay for the defense outright, less the deductible. An important caveat is to determine the scenarios in which the defense will occur, which is often addressed in the company’s governing documents.
Disability insurance is provided in the case of an owner or employee falling ill or becoming injured. These incidents happen outside of the workplace. Disability insurance will provide financial stability to the injured individual in the event of lost income due to an inability to work, which provides stability for all involved.
Renter’s or Property Insurance
Renter’s or property insurance is vital for a smooth plan after damage to a business’s physical location. If you are renting out a building, office suite, etc. it is important to get renter’s insurance to protect your business’s physical assets inside the rented location. Likewise, if your business owns its physical location, you and your business partners should consider entity ownership of the physical location(s) and consider both renter’s insurance and how much insurance is enough to rebuild and replace your physical location and assets. This consideration goes hand in hand with business interruption insurance given the timeframe to rebuild or find a new location as well.
Our team of experienced business law lawyers can help you and your business partners navigate the various insurance types to ensure that your livelihood and loved ones are protected.
What is your growth, exit, or succession plan?
Since you cannot predict the next pandemic, death, disaster, injury, or accident, an updated business plan and succession planning is the most effective way to avoid chaos within your business and loved ones. Starting a business plan with a succession plan may be daunting, but the discussion of goals and business continuation in the event of a disaster is almost as vital as the plan itself. For example, you may have multistate aspirations while your business partner may have a more conservative viewpoint. In the event of death, the perceived value to loved ones may be more than the actual value of the business, which can be addressed annually through an agreed-upon value during an annual meeting, insurance proceeds paid for by the company, or a predetermined valuation technique acceptable to all principals. Here are just a few tips to get you started in creating a business and succession plan:
Create a mission statement to help you, your partner, and employees better understand the goals and vision of the company.
Create a list of factors that are critical for success within your business.
Create a list of potential candidates for advancement and communicate the path of advancement.
Engage your key personnel in the decision-making processes that determine the path of your company either through strategy sessions or open communication
Establish a definitive path forward for value and method of payments in a way to avoid business disruption
Tackling tough conversations with your business partner will provide clarity and peace of mind with respect to your business, customers, and loved ones. Not having a plan in place is in all reality a plan to fail. If you and your business partner have not had these discussions, or need guidance on business planning and succession planning, give the knowledgeable business law attorneys at Handelin Law a call at 775.882.8032 or schedule a consultation with us by clicking the schedule a consultation button provided in the top right corner of our home page.