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Business

Business

FAQ’s – Business

What’s the difference between an LLC and a corporation?

The primary consideration with each is the “veil of protection” they provide between the potentially injurious actions of the company, and the personal assets of the owners; and both these entities provide the same level of protection there. Corporations are a little more “familiar looking” to most people, and more readily understood, but require a little more maintenance. LLCs are more flexible than corporations, and particularly good for “hooking together” related companies; require virtually no maintenance, but the initial operating agreement can be complex and quite daunting to read and understand for someone not used to them.

Are non-compete agreements enforceable in Washington?

Yes, and they have entrapped many an employee who didn’t realize at the time of signing how powerful those restrictive covenants might be years later. In order to be enforceable, they must be “reasonable” in all respects, and be executed in a timely manner and with legally sufficient consideration given to the employee upon signing. If signed at the beginning of employment, usually no payment to the employee is required. If signed years later, the employee must receive “fresh” and reasonably sufficient consideration (such as a cash payment) in exchange for becoming bound by its constraints.

Do I need a majority of the stock to control a corporation?

Not necessarily. If there is no shareholders agreement, then a simple majority will have almost unilateral control. However, with a shareholders agreement, the parties can apportion control of the Board of Directors between them, and therefore allocate control of the corporation. For example, a 1% shareholder could be guaranteed the right to appoint the only Director on the Board, and thereby gain autocratic control of all issues not specifically listed as being outside of his/her control.

In a sale of an incorporated business, is it better to (i) sell all the stock of the corporation, or (ii) instead sell the assets out of the corporation?

Consult your tax advisor. If it has been a Subchapter “S” or “pass-through” corporation for more than 5 years or since its inception, then an asset sale will usually be most advantageous format since it limits the buyer’s liability for prior acts of the company, and the buyer can also write-off those assets (which must however be painfully re-captured someday when they are re-sold). A purchase of stock cannot be written off by the buyer (but avoids that re-capture event someday when re-sold), and comes with all the good, bad and ugly actions of the corporation in the past. A stock sale might be more convenient if the corporation has critical contracts that will come along with it, and not have to be re-signed with those customers or vendors.

How do a seller and buyer of a company make best use of a “terms sheet” or “letter of intent”?

These non-binding memoranda can be extremely useful in “clarifying expectations” of both parties in a non-threatening format before spending a lot of money on legal documents that might otherwise incorrectly structure the sale.

Is it best to sell my company for all-cash at closing, or get a cash down payment and carry the balance on a promissory Note over a number of years?

The price for an all-cash deal might be a little lower; but payment terms are generally more critical than the price. With all-cash, seller must pay capital gains tax off the top, then wonder what to do with the rest of the money. If sold on terms, seller might earn a high interest rate on the pre-tax Note balance over a number of years. Common terms might be 20% cash down, and say 7 years on the Note (7 years is usually long enough for the company to “pay for itself” out of earnings).

Can a seller adequately secure payment of the purchase price?

Probably. First, he’ll usually require that the owner of the buyer corporation to personally guarantee payment of buyer corporation’s Note to the seller. Second, seller will ordinarily receive a recorded UCC lien against all of the assets being sold. Third, seller might receive a possessory pledge of all of the stock of the buyer corporation (not a great remedy if the buyer company fails). In this author’s experience, the percentage of failures of acquired businesses is very low if properly structured up-front.

Are there any special problems in selling a business to children of the owner?

Yes. There is an entire section of the Internal Revenue Code referred to as the “family attribution rules” that can be a major trap for family-held businesses. The IRS doesn’t want the parents to do something really advantageous for their kids. Ask an experienced tax advisor to help you structure the deal. Be prepared in advance with the records/documentation to defend your sale price years later; a Certified Business Appraiser or a CPA with valuation credentials can prepare you for this up-front. If the buyer group contains at least one non-family member for a truly arms-length deal, that will be a tremendous help if the valuation is ever challenged.

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