If you grew up in rural America, it’s a pretty safe bet to say you know a farm or ranch family who experienced a bitter argument after the parents passed away while the farm/ranch assets were being divided. Perhaps you were even one of the unfortunate family members caught up in the turmoil because Mom and Dad never found time to do estate planning, or just couldn’t decide on a method to transition the farm/ranch operation to the next generation.
If you own a farm or ranch, would like to keep the operation in your family for future generations, AND desire to preserve family relationships, now is the time to form a solid succession plan. A good succession plan takes time and isn’t without emotion and compromise, but the result can provide a future for your family and ensure your operation transfers to the next generation with as few problems as possible. Succession planning is a complex matter but here is a brief synopsis of three common succession options we see:
1. Farming heir purchases farm assets from parents as they reach retirement age. The proceeds are incorporated into the parents’ estate, with the intent to share those proceeds with the children upon their death. Drawbacks to this approach may include the requirement that the farming heir have access to large amounts of money or credit to complete the purchase. (Too much debt may financially cripple the farming heir if he/she does not have adequate collateral prior to the sale.) Also, the parents’ will have capital gains tax on the proceeds from the sale. Both of these could be lessened by the parents financing the sale. Keep in mind that should one or both of the parents require multiple years of nursing home care, some or all of this income could be required for their care, leaving little to nothing for their heirs after death.
2. Farming heir purchases farm assets from estate after both parents pass. The drawbacks to this option are very similar to the first option. The farming heir must have access to large sums of money or credit and if the parents required extended nursing home care and received Medicaid, the heirs may be required to sell farm property at public auction to pay Medicaid debt. The upside here is that since the assets would have received a step-up in basis at the parents’ death, the selling heirs will not have to pay capital gains tax.
We get it; starting a new business is exciting and most entrepreneurs can’t wait to dive into the process. The emotions of starting something new can be intoxicating. However, there are also many challenges associated with being a new, small business owner! Using a recent article by Attorney Lee Rosen as inspiration, we hope this list of often-seen business challenges helps you better prepare for your new venture:
1. Loss of freedom. Unless you hire a staff, you are solely responsible for all sales, marketing, clerical duties, accounting work, etc. Even if you do have a staff, you are ultimately accountable when it comes to making sure all tasks are accomplished correctly and on time. Say good-bye to someone else paying for your vacation time, 401K contributions, health insurance and sick leave. These benefits must now be provided by YOU, from profits you generate in your new business.
2. You’ll need help. Very few individuals have the skill or knowledge to start a business without assistance from accountants, attorneys, bankers, etc. Those who do forge ahead without professional advice often end up backtracking and hiring someone at a later date to fix problems that could have been avoided if guidance had been sought at the outset. Fixing problems after they exist almost ALWAYS costs more than doing things correctly in the first place.
3. It’s go time. An idea that sounds good on paper or over a drink with your buddies often is not practical in the real world. Be prepared to skin your knees and stub your toes, a lot, in the early years of your new business. Do your due diligence; research your prospective market and industry to determine whether your business idea has a fighting chance to be successful. Failure to do your homework in this context can cost you thousands of dollars and perhaps your professional reputation. When you open your doors for business, there are no “trial runs”. Customers expect professionalism from day one.
Q: My wife and I have farmed our entire married lives and we are nearing retirement. Several years ago, we formed a Kansas Limited Liability Company (LLC) for our farming operation and now we would like to begin to gift LLC membership units to our three adult children. One of our sons is the LLC manager but the other two children are not involved in the farming operation. I’d like the children to receive only distributions of income from the LLC at this point, not voting rights. What is the best way to make this happen?
A: You and your wife can each gift up to $15,000 per child, per year, without federal or state gift tax consequences. Therefore, you can gift each child a combined total gift of up to $30,000 worth of LLC units each year. Unless your existing Operating Agreement established a value for each LLC unit or a method of valuation, we would recommend that you contact a certified appraiser to establish the current value of your LLC. Based on information from your appraisal, you will be able to determine how many units you can gift to each child and still avoid federal and state gift tax consequences.
Before you proceed to gift any LLC units, you should have your Operating Agreement thoroughly reviewed by an attorney experienced in corporate law to determine whether your existing Operating Agreement
“An ounce of prevention is worth a pound of cure.”
You may be familiar with this famous quote by Benjamin Franklin and think advice from the 1700s would be inapplicable for business decisions in 21st century. However, our experience tells us otherwise.
Business owners who try to act as their own attorney when entering into a legally binding document, like a commercial lease agreement, assume a tremendous amount of financial risk. Many intelligent individuals find themselves in the middle of what would have otherwise been a preventable legal or financial mess if they had only sought proper legal advice.
Some common items that often trip up business owners when it comes to commercial leases are the exclusion or deficient use of the following clauses:
1. Attorney Fee Clause: If your contract dispute requires litigation, attorney’s fees and court costs should be paid by the person who loses the litigation. Including this clause acts as a deterrent to the filing of frivolous claims.
2. Use of the Property: Avoid surprises by ensuring that the tenant’s intended use of the property is explicitly permitted in the lease.
3. Approval of Alterations and Signage: A commercial lease should require the landlord’s prior written approval prior to the tenant making any substantial alterations to the property. There should also be language requiring that any alterations made be in a workmanlike manner. Finally, the landlord should have to approve in writing to the tenant’s outdoor signage. This is due to the fact that many signage require making permanent alterations to the exterior of the building.
Are you an owner in a multi-owner Corporation, LLC, S-Corp, or Partnership? If so, have you given any thought to or prepared a formal business succession plan?
One of the more difficult parts of being a business owner can be deciding how to wind up a business or determine how to restructure ownership after an owner wants out or dies. In order to simplify this process, the business owners should insist on having a formal Buy/Sell Agreement signed when they begin their business relationship.
A Buy/Sell Agreement is a legally binding contract that stipulates how an owner’s share of a business may be reassigned if that owner dies or otherwise leaves the business. Buy/Sell Agreements often stipulate that the available share be sold to the remaining owners or to the company. Buy/Sell Agreements can take many forms and there are no requirements as to how such agreements must be structured. Terms for such an agreement are negotiated between the owners. Therefore, the advice of an attorney is needed to ensure the best possible exit strategy for all of the owners.
Important clauses that every Buy/Sell Agreement should contain:
1. Valuation. The Agreement should include detailed information about your business’ worth. You should consider having it professionally appraised or using a set formula to value the business. You want the valuation provision clearly defined to establish a fair purchase price in the future in order to reduce conflicts.
2. Identify the Parties. The Buy/Sell Agreement must identify all the owners entering into the agreement.
3. Funding the Buyout. You want to make sure the Buyer has the financial ability to fulfill the payment terms of the Agreement. Many Buy/Sell Agreements utilize life insurance policies to ensure the purchase will be adequately funded. Don’t just assume the Buyer will have the cash at the time to purchase the business or that they can borrow 100% of the purchase price.
Small Business Week is celebrated May 5-11 in recognition of the entrepreneurs who saw a need in their community and stepped out in faith by opening a business to provide a solution to that need. These business owners are key to our economy and without their ingenuity, hard work and dedication, many of our communities would be suffering.
Small business owners hold a special place in our hearts at Davis & McCann. In fact, we’ve helped over 100 businesses get a start in Western Kansas in the past five years alone. There’s something inspiring about listening to someone share their dreams and visions to make their community better. We want to see people succeed and do well in life. Being able to play a small role in someone’s success by helping them get started with a new business venture allows us to end our day feeling content, knowing we’ve helped make our community just a little better than it was yesterday.
Fledgling businesses often find themselves full of doubt when times get tough. With so much business being lost to internet sales, local businesses often fail to see the value they are providing to community members. What are some ways you can encourage your local small businesses? Here are just a few ideas that can go a long way to keeping that entrepreneur flourishing in your local community:
1. Like, share and comment on any social media the business may post. Sharing and commenting on a post will help the information stay visible on social media to a broader audience, and potentially draw the attention of prospective new customers.
2. Leave a positive review for the business on Google, Yelp, or their social media or website. Positive online reviews help attract new customers.
2. Encourage friends and family members to check out the business. Word of mouth from trusted sources carries a lot of credibility.
3. Lend moral support. Stop by and bring a cup of coffee or a snack and let your favorite business owner know you appreciate the service they are providing in your area. Encouraging words go a long way when days are difficult.
4. Don’t expect free goods or services. Businesses aren’t open just for laughs. It is extremely common for
Starting a new business is exciting but the decisions you make in the beginning can have long-lasting impacts on your future profitability and success. If you’re ready to start your new for-profit business in the State of Kansas, here are a few basics on the various business entities available to you:
• Although arguably the least complicated way to set up your business, it also creates the greatest liability risk for the owner.
• No annual minutes are required and no reports or filings, other than income tax filings, have to be made with the State.
• With this form of business entity, the owner is 100% liable for the company debts and obligations.
If you own income-producing property, one of the ever-present concerns you face is the possibility of being sued by a tenant. If you own the income-producing property individually (not in and LLC or corporation), personal assets, such as your home and other investments could be subject to the Court judgment, should you be found guilty in the lawsuit. Additionally, have you considered what will happen when you die? Will your family fight over your home, vacation home, or investments properties?
If you haven’t taken the necessary steps to protect your assets from lawsuits or probate, you or your heirs could face a nightmare of legal fees and court dates. Two commonly used tools to protect real estate assets include limited liability companies (LLC) and trusts:
LLC: In a nutshell, an LLC protects your personal assets from lawsuits or claims that results from your ownership of assets in the LLC (in this case, real estate). You must comply with Kansas LLC laws in order to receive those protections, but with the assistance of an experienced attorney, this is easily accomplished. Your attorney should prepare the LLC formation documents, file your LLC with the State and advise you on your compliance duties with the State. Formation documents should at least include: Limited Liability Articles of Organization and an Operating Agreement detailing who the members are and what their
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