Representation of Businesses
Baratta, Russell & Baratta’s attorneys represent numerous regional businesses to answer all of their legal needs. Our clients are closely-held, small and mid-sized business. Many are family-owned. Our firm provides sophisticated legal services in the areas of corporate organization and shareholder agreements, commercial contracts and third-party relationships, employment contracts, tax matters and business succession planning.
Our attorneys have extensive experience representing businesses and investors in a variety of corporate transactions, including: the purchase or sale of a business entity or of business assets; the purchase, sale or lease of commercial real estate; and the financing of corporate operations.
Organizing a Business
When starting a business, one primary concern is to make sure that the liabilities of the business don’t become personal liabilities charged to the entrepreneur and his family. By creating a legal entity to operate the business, the owners can take advantage of “limited liability” and shield themselves from claims of creditors of the business. There are a number of different entities that will accomplish this goal, and it is important to carefully consider the advantages and disadvantages of each:
A corporation may be the most recognizable form of a business entity. The owners control the corporation by owning its stock. The stockholders will elect a board of directors to manage corporate affairs and appoint officers to run the day-to-day operations. Many of our clients are family businesses or closely held businesses where the stockholders, directors and officers are the same people.
The stockholders are protected from personal liability for the corporation’s debts. However, income to the corporation is taxed twice, once when received by the corporation, and once when distributed to the stockholders.
An “S” corporation may solve this problem. The stockholders are protected by limited liability, but the income is “passed through” the corporation and is taxable only to the stockholders. In order to be recognized by the Internal Revenue Service, an S corporation must comply with a number of restrictions, such as a limitation on the number and type of stockholders.
A partnership is a business in which the ownership interest is held by two or more partners. All business income is passed through the business and taxable only to the partners, individually. The arrangement is less formal than a corporation. However, traditionally partners are liable for the debts of the partnership – there is no limited liability. A Limited Partnership may offer limited liability to some partners, and may be an advantageous vehicle for certain types of investors.
Limited Liability Company
A limited liability company (LLC) is a hybrid of the corporation and partnership models. The entity is less formal than a corporation, offers limited liability to its owners, and its income is taxed only once, when it is passed through to the owners. Owners of an LLC are known as Members, and the members will appoint Managers to operate the business. The entity is governed by an Operating Agreement which can be tailored to the specific needs of the business and its owners. The LLC is an increasingly popular way of doing business.
Buying or Selling a Business
Often a part of the life cycle of any business is to strategically acquire other entities, and/or to sell the business to a different entity and merge operations. There are generally two ways to accomplish such a transaction.
A stock sale involves the sale of the actual ownership interest of the entity (i.e., stock of a corporation, membership interest of an LLC). All assets, liabilities, etc. are transferred along with the stock.
An asset sale involves the sale of substantially all of the assets of the business. This includes not only the physical assets like equipment and real estate, but intangible assets like client lists, contractual relationships and customer goodwill. The purchasing entity will avoid taking on the liabilities of the selling entity.
Business Succession Planning
Business succession planning means planning for the foreseeable and unexpected contingencies in the lives of the owners of the business. Many of Baratta Russell and Baratta’s business clients started as estate planning clients for the principals of the business. These two aspects of a business owner’s life go hand in hand.
Business planning is an essential part of the estate plan for any business owner. What happens when he or she passes away? Also, at some point in time, the owners of a business will likely want to retire. It is possible that the owners may become disabled and unable to operate the business.
It is of paramount importance that business owners plan for future circumstances. Business owners must consider issues such as who will take over the business, who would want to buy their interest and at what price, and how such a purchase will be financed and paid. For family businesses, these questions may revolve around transferring control to the next generation at the appropriate time. For unrelated partners, the primary issue may be providing funds to buy each other out in the event of death or disability. Life insurance can be a key component in this type of planning.
Critical to the continued success of a business are the transition plans of its owners. Whether those plans include transfers between owners, between the owners’ families or to third-parties, important planning must take place to insure the continued viability of the business entity.
Business succession planning is interwoven with a client’s estate plan and our firm possesses the necessary business planning and estate planning expertise to present all options of a plan and then to effectively implement the plan.
Business owners may determine to transfer a business to their family during their lifetime. This type of plan may include a recapitalization of the company into voting and non-voting shares so that the business owner may maintain full control over the business while transferring the asset to family members. A plan may also entail giving family members more responsibility in managing the business in order to appropriately “season” the family members for ownership responsibilities.
Of course, the planning necessary for business succession may be the preparation of a company for sale to a third-party. Our firm can lead the team of professionals that can assist with the preparation of a company for such a sale, including valuations and marketing plans.
Finally, the firm ensures that if a business owner passes, that the business succession plans, established through an estate plan, are thorough, well thought out and ensure the family the easiest possible transition while securing the financial security of the remaining family members.
It is important for many businesses to protect themselves by entering employment contracts with key employees. These agreements can include limitations on the employee’s conduct after the employment is terminated, such as promises not to solicit customers, not to disclose confidential information, and not to compete with the employer. The contracts should be carefully crafted to ensure that they are enforceable in Pennsylvania.