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References

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Retiremement & Assets

Dear Professor Bruce:

I have a furniture repair business. I am reaching retirement and have two children. One of my children works in the business with me and the other does not. I want them to share equally in the profits of the business, but I also want my child who is in the business with me to manage the business without her brother interfering. What can I do?

Answer:

Essentially, you want to separate ownership of your business into "management" and "profits". This is not an unusual situation, especially in such circumstances.

Attorney Marc S. Bekerman offers some excellent advice:

The first step is to determine how your business is established legally. This can be done by reviewing your most recent income tax returns or asking your accountant if you have one. Many small businesses operate as a sole proprietorship since this is usually the easiest and least expensive method. If you are unsure, it is likely this is how your business is structured (but this should be confirmed before proceeding).

There are many limitations as a sole proprietorship and it is not really suitable for your situation. Instead, you should create either a corporation or a limited liability company for the business. In addition to addressing your management issue, there are other reasons to use these entities (including protecting the owners of the business from personal liability for the debts of the business).

If the business is a limited liability company, your state law may permit a manager to run the business apart from the owners. This is usually done either when creating the limited liability company or by an agreement among the owners. If the business is a corporation, it could issue two separate types of stock (one for the management rights and the other for the profit rights). Either way, the business could enter into a long-term management agreement with the child who will manage the company. I also recommend that you consider speaking with your children regarding your intent as the child who will not be involved in management may respect the decision more if you explain it to him.

Finally, you may want to consider the use of trusts to hold the business for the benefit of your children. With a trust, the trustee would own the company and would receive the company's profits, which would then distribute to the trust's beneficiaries. Use of a trust may be more complicated, but it can also accomplish many goals if done properly.

However you proceed, it is important to have good advisors to assist you.

For further information, please visit www.bekermanlaw.com.

Many small businesses operate as a sole proprietorship since this is usually the easiest and least expensive method.