You probably don’t have to be told about the need for a will. But do you know what provisions should be included and what’s best to leave out? The answers to those questions depend on your situation and may depend on state law.

Basic provisions

Typically, a will begins with an introductory clause, identifying yourself along with where you reside (city, state, county, etc.). It should also state that this is your official will and replaces any previous wills.

After the introductory clause, a will generally explains how your debts and funeral expenses are to be paid. The provisions for repaying debt generally reflect applicable state laws.

Don’t include specific instructions for funeral arrangements. It’s likely that your will won’t be accessed in time. Spell out your wishes in a letter of instructions, which is an informal letter to your family.

A will may also be used to name a guardian for minor children. To be on the safe side, name a backup in case your initial choice is unable or unwilling to serve as guardian or predeceases you.

Specific bequests

One of the major sections of your will — and the one that usually requires the most introspection — divides up your remaining assets. Outside of your residuary estate, you’ll likely want to make specific bequests of tangible personal property to designated beneficiaries.

If you’re using a trust to transfer property, make sure you identify the property that remains outside the trust, such as furniture and electronic devices. Typically, these items won’t be suitable for inclusion in a trust. If your estate includes real estate, include detailed information about the property and identify the specific beneficiaries.

Once you’ve covered real estate and other tangible property, move on to intangible property, such as cash and securities. Again, you may handle these items through specific bequests where you describe the property the best you can.

Finally, most wills contain a residuary clause. As a result, assets that aren’t otherwise accounted for go to the named beneficiaries, often adult children, grandchildren or a combination of family members.

Naming an executor

Toward the end of the will, name the executor — usually a relative or professional — who is responsible for administering it. Of course, this should be a reputable person whom you trust. Also, include a successor executor if the first choice is unable to perform these duties. Frequently, a professional is used in this backup capacity.

Cross the t’s and dot the i’s

Your attorney will help you meet all the legal obligations for a valid will in the applicable state and keep it up to date. Sign the will, putting your initials on each page, with your signature attested to by witnesses. Include the addresses of the witnesses in case they ever need to be located. Don’t use beneficiaries as witnesses. This could lead to potential conflicts of interest. Contact us with questions.

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If you own an interest in a closely held business, it’s critical to have a well-designed, properly funded buy-sell agreement. Without one, an owner’s death can have a negative effect on the surviving owners.

If one of your co-owners dies, for example, you may be forced to go into business with his or her family or other heirs. And if you die, your family’s financial security may depend on your co-owners’ ability to continue operating the business successfully.

Buy-sell agreement and estate taxes

There’s also the question of estate taxes. With the federal gift and estate tax exemption currently at $11.4 million, estate taxes affect fewer people than they once did. But estate taxes can bring about a forced sale of the business if your estate is large enough and your family lacks liquid assets to satisfy the tax liability.

A buy-sell agreement requires (or permits) the company or the remaining owners to buy the interest of an owner who dies, becomes disabled, retires or otherwise leaves the business. It also establishes a valuation mechanism for setting the price and payment terms. In the case of death, the buyout typically is funded by life insurance, which provides a source of liquid funds to purchase the deceased owner’s shares and cover any estate taxes or other expenses.

3 options

Buy-sell agreements typically are structured as one of the following agreements:

1. Redemption, which permits or requires the business as a whole to repurchase an owner’s interest,
2. Cross-purchase, which permits or requires the remaining owners of the company to buy the interest, typically on a pro rata basis, or
3. Hybrid, which combines the two preceding structures. A hybrid agreement, for example, might require a departing owner to first make a sale offer to the company and, if it declines, sell to the remaining individual owners.

Depending on the structure of your business and other factors, the type of agreement you choose may have significant income tax implications. They’ll differ based on whether your company is a flow-through entity or a C corporation. We can help you design a buy-sell agreement that’s right for your business.

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Among the fastest ways for a business to fail is because of mismanagement or malfeasance by ownership. On the other hand, among the slowest ways is an ineffective or dysfunctional sales department.

Companies suffering from this malady may maintain just enough sales to stay afloat for a while, but eventually they go under because they lose one big customer or a tough new competitor arrives on the scene. To ensure your sales department is contributing to business growth, not just survival, you’ve got to ask some tough questions. Here are four to consider:

1. Does our sales department communicate customers’ needs to the rest of the company? Your sales staff works on the front lines of your industry. They’re typically the first ones to hear of changes in customers’ needs and desires. Make sure your sales people are sharing this information in both meetings and written communications (sales reports, emails and the like).

It’s particularly important for them to share insights with the marketing department. But everyone in your business should be laser-focused on what customers really want.

2. Does the sales department handle customer complaints promptly and satisfactorily? This is related to our first point but critical enough to investigate on its own. Unhappy customers can destroy a business — especially these days, when everyone shares everything on social media.

Your sales staff should have a specific protocol for immediately responding to a customer complaint, gathering as much information as possible and offering a fair resolution. Track complaints carefully and in detail, looking for trends that may indicate deeper problems with your products or services.

3. Do our salespeople create difficulties for employees in other departments? If a sales department is getting the job done, many business owners look the other way when sales staff play by their own rules or don’t treat their co-workers with the utmost professionalism. Confronting a problem like this isn’t easy; you may unearth some tricky issues involving personalities and philosophies.

Nonetheless, your salespeople should interact positively and productively with other departments. For example, do they correctly and timely complete all necessary sales documents? If not, they could be causing major headaches for other departments.

4. Are we taking our sales staff for granted? Salespeople tend to spend much of their time “outside” a company — either literally out on the road making sales calls or on the phone communicating with customers. As such, they may work “out of sight and out of mind.”

Keep a close eye on your sales staff, both so you can congratulate them on jobs well done and fix any problems that may arise. Our firm can help you analyze your sales numbers to help identify ways this department can provide greater value to the company.

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Many business owners reach a point where managing the financial side of the enterprise becomes overwhelming. Usually, this is a good thing — the company has grown to a point where simple bookkeeping and basic financial reporting just don’t cut it anymore.

If you can relate to the feeling, it may be time to add a CFO or controller. But you’ve got to first consider whether your payroll can take on this generally high-paying position and exactly what you’d get in return.

The broad role

A CFO or controller looks beyond day-to-day financial management to do more holistic, big-picture planning of financial and operational goals. He or she will take a seat at the executive table and serve as your go-to person for all matters related to your company’s finances and operations.

A CFO or controller goes far beyond merely compiling financial data. He or she provides an interpretation of the data to explain how financial decisions will impact all areas of your business. And this individual can plan capital acquisition strategies, so your company has access to financing, as needed, to meet working capital and operating expenses.

In addition, a CFO or controller will serve as the primary liaison between your company and its bank to ensure your financial statements meet requirements to help negotiate any loans. Analyzing possible merger, acquisition and other expansion opportunities also falls within a CFO’s or controller’s purview.

Specific responsibilities

A CFO or controller typically has a set of core responsibilities that link to the financial oversight of your operation. This includes making sure there are adequate internal controls to help safeguard the business from internal fraud and embezzlement.

The hire also should be able to implement improved cash management practices that will boost your cash flow and improve budgeting and cash forecasting. He or she should be able to perform ratio analysis and compare the financial performance of your business to benchmarks established by similar-size companies in the same geographic area. And a controller or CFO should analyze the tax and cash flow implications of different capital acquisition strategies — for example, leasing vs. buying equipment and real estate.

Major commitment

Make no mistake, hiring a full-time CFO or controller represents a major commitment in both time to the hiring process and dollars to your payroll. These financial executives typically command substantial high salaries and attractive benefits packages.

So, first make sure you have the financial resources to commit to this level of compensation. You may want to outsource the position. No matter which route you choose, our firm can help you assess the financial impact of the idea.

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Limited liability company (LLC) members commonly claim that their distributive shares of LLC income — after deducting compensation for services in the form of guaranteed payments — aren’t subject to self-employment (SE) tax. But the IRS has been cracking down on LLC members it claims have underreported SE income, with some success in court.

SE tax background

Self-employment income is subject to a 12.4% Social Security tax (up to the wage base) and a 2.9% Medicare tax. Generally, if you’re a member of a partnership — including an LLC taxed as a partnership — that conducts a trade or business, you’re considered self-employed.

General partners pay SE tax on all their business income from the partnership, whether it’s distributed or not. Limited partners, however, are subject to SE tax only on any guaranteed payments for services they provide to the partnership. The rationale is that limited partners, who have no management authority, are more akin to passive investors.

(Note, however, that “service partners” in service partnerships, such as law firms, medical practices, and architecture and engineering firms, generally may not claim limited partner status regardless of their level of participation.)

LLC uncertainty

Over the years, many LLC members have taken the position that they’re equivalent to limited partners and, therefore, exempt from SE tax (except on guaranteed payments for services). But there’s a big difference between limited partners and LLC members. Both enjoy limited personal liability, but, unlike limited partners, LLC members can actively participate in management without jeopardizing their liability protection.

Arguably, LLC members who are active in management or perform substantial services related to the LLC’s business are subject to SE tax, while those who more closely resemble passive investors should be treated like limited partners. The IRS issued proposed regulations to that effect in 1997, but hasn’t finalized them — although it follows them as a matter of internal policy.

Some LLC members have argued that the IRS’s failure to finalize the regulations supports the claim that their distributive shares aren’t subject to SE tax. But the IRS routinely rejects this argument and has successfully litigated its position. The courts generally have imposed SE tax on LLC members unless, like traditional limited partners, they lack management authority and don’t provide significant services to the business.

Review your situation

The law in this area remains uncertain, particularly with regard to capital-intensive businesses. But given the IRS’s aggressiveness in collecting SE taxes from LLCs, LLC members should assess whether the IRS might claim that they’ve underpaid SE taxes.

Those who wish to avoid or reduce these taxes in the future may have some options, including converting to an S corporation or limited partnership, or restructuring their ownership interests. When evaluating these strategies, there are issues to consider beyond taxes. Contact us to discuss your specific situation.
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