Maintaining Control of Your Business Through Estate Planning

Maintaining Control of Your Business Through Estate Planning

By Alan G. Orlowsky

In estate planning, there is more to do with a family business than simply create a succession plan. In fact, in some cases, over-planning a business succession can lead to younger generations or others taking control of the business way before an owner is prepared to cede control. Smart business owners who wish to retain control of a family or multi-generational business can do so through careful estate planning and ensure that their ownership is locked in.

Take Stock

Stockholders have different rights than other executives in the business. Typically, people who own the stock have control over corporate choices. One way to retain control of a business through stock is to issue non-voting stock to children or investors. It gives them equity in the business but no voting power, and issuing non-voting stock is legal in all corporation types, including an S-corp.

If there are multiple owners for a closely-held business, try to restrict the stock as much as possible. Make sure that you lay out transfer restrictions in the buy-sell agreement of the business as well as on the stock certificates themselves. This keeps one of the owners from simply handing over stock, or control, to an outside party.

Close Corporations Count

Some states have laws that apply specifically to closely-held companies because corporate formalities do not always work with closely-held businesses. However, many of those laws only apply if they are explicitly stated in the company’s Articles of Incorporation, bylaws, or other legal documents.

Some of these closely-held business state laws can help an owner lock in control. Some of these laws include:

  • Permission to dispense the Board of Directors meeting;
  • Allowing voting trusts;
  • Requiring straight voting instead of cumulative voting; and
  • Mandating that major corporate actions can only be done with a super-majority of stockholders.

Rent vs. Own Stock

For a business owner who wants to retain complete control over the business, the most important thing is to not give away stock. In essence, stock options are just delayed ownership of stock, and even non-voting stock still entitles stockholders to get corporate information and file a derivative lawsuit. Therefore, one of the best options to retain control over the business is to offer other incentives besides stock.

For example, options similar to stock that can be offered instead include nonqualified deferred compensation arrangements like phantom stock and stock appreciation rights. Another option is to create a nonqualified plan that is designed specifically for that person. For example, offering the Sales VP a portion of the sales success or offering the CFO part of the profit gives them an incentive to work hard for the business but give none of the control.

Contact an Illinois Business Law Attorney Today

If you or someone that you know has questions about how estate and business planning can help their enterprise in Northbrook, Skokie, Evanston, Glencoe, Glenview, or Highland Park, let the experienced attorneys at Orlowsky & Wilson, Ltd. help. Call or contact the office today for a free and confidential consultation of your case.

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