How Do I Value My Business?

What are the Hazards of Selling a Business?
The key hazard in selling a business is confidentiality. If you are selling a car, your house or a piece of real estate, you generally try to draw a lot of attention to the thing you are selling in hopes of attracting prospective purchasers.
However, it can be very dangerous to draw attention to the fact that you are trying to sell your business. When your employees know that your business is for sale, they will start sending out their resumes and leave at the first opportunity. Your suppliers will all want to put you on COD since you may not be around next month. Your banker may want to have a talk with you about the status of your loan. Your competitors will start telling everyone that you are going out of business and most importantly your customers may become anxious about committing their business to someone who is selling theirs.
If you are fortunate enough to find a buyer, you will then be expected to make numerous warranties with regards to there being absolutely no problem in the operation of the business. These warranties can amount to a long term obligation on your part after the sale of the business.

What are the Hazards of Buying a Business?
In the transaction of a business sale, a seller who can get his price and limit his warranties is home free. However, the buyer has to worry about every single thing that can go wrong with the business, as well as all of the things that have gone wrong that he does not yet know about.
In order to evaluate a business acquisition, you need to engage in a serious due diligence process to get a handle on the business and uncover any existing problems.
During the due diligence process, you should try to keep away competitive buyers with a letter of intent. Once the due diligence is over, you will close into a purchase agreement which should contain numerous warranties of the seller.
The financial statements should be independently verified and the seller should fully disclose by schedule in the purchase agreement any liability or contingent liability not disclosed on the financial statements, as well as any collectability problems with the accounts receivable. All real and personal property should be scheduled and verified as to physical existence, title, value and absence of liens and encumbrances. All leases should be disclosed and analyzed, as well as all employment arrangements, retirement plans, insurance policies, benefit plans and other fringe benefits. All litigation or threats of litigation should be disclosed and analyzed, as well as all proceedings or investigations by any governmental authority. Environmental matters and intellectual property should be dealt with in great detail. Special warranties and analyses are required with regards to any foreign operations. In short, everything that has or could affect the business should be examined.

How Do I Setup a Business?
There are numerous issues which must be addressed when setting up a business. First and foremost is the choice of entity from which to operate. The alternatives include corporations, partnerships, limited liability companies and sole proprietorships. Each one of these entities have advantages and disadvantages, both tax related and non-tax related, which must be considered in choosing the appropriate entity for the business in which you intend to engage.
Other issues which arise in setting up a business include salaries and non-competition agreements for key employees of the business as well as banking matters including term loans and credit lines. If the business has more than one owner, allocation of profits and losses and buy and sell agreements among the owners are also key issues.

Should I Incorporate?
A corporation is a separate legal entity formed to engage in a business. The owners of the corporation are referred to as shareholders and their ownership is represented by shares of stock. The primary advantage of incorporating your business is limited liability. Owners of the company will not be personally responsible for the debts of the business unless they specifically contract to be so. If the owner or owners do not operate the corporation as a separate entity and co-mingle their property with that of the corporation, they may lose this limited liability. An experienced business attorney can assist the owners in maintaining the existence of the corporation as a separate entity.
There are also federal, state and local tax consequences to operating as a "C" corporation, an "S" corporation or an L.L.C. which has limited liability but is otherwise treated as a partnership, “S” corporation or proprietorship depending on your elections when making IRS filings and obtaining a Federal Identification Number.

Should I Elect to be Taxed as an “S” Corporation?
A corporation is a separate legal entity and as such is subject to income taxes on its earnings. The owners of the corporation may be taxed again on these earnings if they are distributed to the owners in the form of dividends. Similarly, double taxation can apply on the sale of the assets of the corporation. It is for this reason that regular corporations, known as "C" corporations, are said to be subject to a double level of taxation. In order to avoid this double level of taxation, a corporation may make an "S" election. This "S" election must be filed within two months and fifteen days of the inception of the corporation in order to get maximum protection, but can be filed during a later year.
Once an "S" election becomes effective, the profits or losses of the corporation will flow through to the shareholders and be taxed or deducted on their individual returns based on the pro-rata percentage of ownership held by each of the shareholders. This is similar to the tax treatment of a partnership, however, since the entity is a corporation, the shareholders still get the protection of limited liability in connection with the creditors of the business. However, "S" corporations do not have some of the partnership tax benefits of the limited liability company, known as the L.L.C. (which elect to be taxed as partnerships), which also has the same limited liability protection from creditors. L.L.C.s, on the other hand, do not have some of the tax benefits of "S" corporations, with regards to self-employment tax and social security benefits.
Recent case law has called into question the limited liability protection for single member L.L.C.’s that are treated as disregarded entities for federal income tax purposes.

Should I Consider an L.L.C.?
Limited liability companies have gained so much popularity in the last few years that they are now generally the entity of choice among small businesses in the United States. A limited liability company is an entity which combines the advantages of a corporation with those of a partnership. A limited liability company will provide its owners with limited liability and the profits or losses of the company will flow through to the owners of the business and be taxed or deducted on their individual returns. Additionally, there are certain other tax advantages to a limited liability company which make it more attractive than an "S" corporation. One major disadvantage of a limited liability company is that in certain instances it may increase the self-employment taxes payable by those individuals who are responsible for the management of the business, and may adversely affect those receiving social security benefits.
An L.L.C. may elect to be taxed as an "S" Corporation, and single member L.L.C.'s are treated, by default, as disregarded entities for federal income tax purposes, having their profits and losses taxed on Schedule C of an individual's personal tax return as a proprietorship.

What are the Advantages of Employment Contracts?
Employment contracts are a great tool to afford the employer some protection against employee defections. From the employee's viewpoint, the employment contract provides the security of a guaranteed salary and benefits for a period of time, as long as the employee fulfills his employment duties. The contract would most likely contain a list of items which would constitute reasonable cause to terminate an employee prior to the expiration of the employment term, and would provide for liquidated damages where an employee is prematurely terminated without reasonable cause.
The employer can also be afforded protection in the contract in exchange for the employer's commitment to compensate the employee for a specified period of time. This protection can include covenants of non-competition, prohibition of the employee's solicitation of customers or other employees, confidentiality obligations regarding trade secrets and provisions which vest ownership of any inventions by the employee in the employer.
These protective provisions are highly scrutinized by Louisiana courts and will be unenforceable if they do not strictly comply with the requirements of law.

What do Buy-Sell Agreements accomplish?
What would it be like to be in business with your partner's spouse and children?
An agreement to buy and sell among all of the stockholders of a corporation or all of the partners of a partnership can help the business to weather the storms of the death or divorce of one of the owners, or the death of an owner's spouse, as well as business disputes between the owners.
In addition, a properly insured Buy and Sell Agreement will allow a business to survive the death of an owner, particularly in meeting its loan obligations and providing a nest egg for the deceased partner's spouse.

Do I Need a Customer Contract or Distributor Agreement?
In offering goods for sale or providing services, it is often necessary to have an appropriate customer contract in place. These contracts typically include warranties on the goods and services provided, including a clarification of what is and is not included in the warranty. These contracts also cover allocation of transportation costs and risk of loss for goods in transit.
Many local companies offer top of the line goods which can be competitive in national and international markets. Distributor agreements with companies who have a distribution system in place can be a very effective marketing tool. These distributor agreements must deal with adequate protection from copyright, trademark or patent infringement. It is also important to insulate yourself as much as possible from liability arising out of the acts or omissions of the distributor.

Should I Register my Trademark or Servicemark?
A trademark is a word, mark or symbol which is used to identify a company's goods and a servicemark is a word, mark or symbol which is used to identify services offered by a company. Registration is not necessary to assert ownership of a particular trademark or servicemark. However, by registering your mark, you are afforded greater protection against infringement. Registration of a trademark or servicemark creates prima facie evidence that the mark has been used to identify an entity's goods or services at least as early as the filing date. Additionally, registration with the United States Patent and Trademark Office provides the registrant with greater remedies in the event the holder of a mark is forced to pursue a cause of action for infringement, including entitlement to attorney's fees.
A trademark or servicemark can also be registered with the Secretary of State of Louisiana. Once the mark is registered, the Secretary of State will not allow another person or entity to register the same or a deceptively similar mark in this State.

What is a Master Service Agreement?
A Master Service Agreement is an agreement common in the oil industry entered into between an operator or turnkey driller and an oilfield service company. The agreement does not bind the operator or driller to use the service company nor does it obligate the service company to accept work offered to it. However, the Master Service Agreement is intended to govern the relationship of the parties in the event that they do any business. A Master Service Agreement allows work to commence on a simple purchase order rather than having to negotiate a contract for each job.
Master Service Agreements are typically drafted by the operator or turnkey driller and, not surprisingly, contain terms very unfavorable to the service contractor. Examples of these include responsibility for personal injury at a work site, responsibility for lost or damaged equipment, responsibility for damage to the environment, payment terms and lien rights of the service company in the event of non-payment.
Through negotiations with the operator or turnkey driller, many of these provisions can be amended in a manner which is more tolerable to the service contractor. If these amendments are not agreed to by the operator or turnkey driller, it is imperative for the service contractor to verify with his insurer that any exposure created by the terms of the Master Service Contract is covered by insurance.

What Protections Does the Unfair Trade Practices Act Provide?
There are many laws which have been enacted to protect individuals and companies from unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce. In Louisiana, business owners and consumers are afforded protection under the Unfair Trade Practices and Consumer Protection Act.
The laws contained in this Act provide for the recovery of damages in connection with unlawful conduct perpetrated by retailers, credit card companies and many other businesses. Additionally, the Act entitles the injured person or entity to a recovery of attorney's fees and if certain formalities are followed, may entitle the injured party to punitive damages equal to three times the actual damages, sustained depending on the actual facts of the case.

Do I Need A Will?
According to insurance company statistics, most people do not need a will. This is because over eighty (80%) percent of the general U.S. population will die with a zero or negative net worth. However, if you have more assets than debt, after including any life insurance proceeds which would be payable upon your death, then you should definitely consider making a will.

What are the Consequences if I don’t have a Will?
In the absence of a duly executed will, Louisiana law controls who will receive your assets upon your death. These laws may not provide for the distribution of assets which you desire.
For example, in the absence of a will, a surviving spouse will be entitled only to the use and enjoyment of the deceased spouse's share of community property. This interest held by the surviving spouse is referred to as a usufructuary interest. The surviving spouse will be prohibited from selling the non-consumable assets which are subject to the usufructuary interest without the consent of the naked owners who are normally the children or other descendants of the deceased spouse. Furthermore, this usufruct will terminate upon the death or remarriage of the surviving spouse. The surviving spouse would not receive any interest in any separate property of the decedent if he is survived by any descendants.  These problems can be solved with a will.

What are the Benefits of having a Will?
The benefits of having a will are numerous and vary with a person's particular circumstance.  Some of the most common reasons involve minimizing taxes, naming an executor to avoid the need of posting bond in a succession proceeding, maximizing the control over community assets for the surviving spouse and making sure that your estate is distributed exactly in accordance with your wishes while minimizing all costs.

How do I Prepare to Create a Will, and how do I Store the Will?
There are a few things to consider before drawing up your will and storing it. Planning ahead for the visit to the attorney's office can save you time and money. Before the initial meeting with an attorney, you should make a list of all of your property and your debts. You should further gather up all insurance policies and statements regarding any IRAs or retirement plans.
Additionally, be prepared to provide the attorney with the names, addresses and social security numbers of those individuals who you intend to receive your property upon your death. Savings can be realized by completing an information questionnaire, provided by the attorney, in advance of your office conference.
Once your will is executed before a Notary Public and two witnesses, you need to store it in a safe place. You might consider keeping it at home in a fireproof safe or in a safe deposit box at your bank. Wherever you store your will, make sure that your family knows where it is and can get to it when you die.

What is Forced Heirship?
Forced heirship is a legal doctrine which is unique to Louisiana. Under Louisiana law, certain qualifying children and other descendants of a deceased person are entitled to a portion of the property of the decedent at the time of his death. If there is only one forced heir, the forced portion or the portion to which the forced heir is entitled is one-fourth of the net estate of the decedent and if there are two or more forced heirs, the forced portion is equal to one-half of the estate of the decedent. The value of certain property transferred by the decedent before his death for less than fair market value may be included in the calculation of his net estate. However, life insurance and qualified retirement accounts are excluded in the calculation of the net estate.
If the decedent so provides in his will, a surviving spouse can receive a usufructuary interest over the property which is bequeathed to or inherited by the forced heirs. This usufructuary interest entitles the spouse to use the property and also entitles the spouse to any interest or other fruits derived from the property.
Under Louisiana law, forced heirs are defined as those children who, at the time of the death of the decedent, are twenty-three years of age or younger, as well as those children regardless of their age who, because of mental incapacity or physical infirmity, are permanently incapable of taking care of their persons or administering their estates at the time of the death of the decedent. If a child predeceases his mother or father, that child's children may in certain cases become forced heirs of their grandfather and grandmother through representation.

Can I Avoid Forced Heirship?
The forced heirship laws of Louisiana require an individual to leave a certain portion of his property to his children or other descendants who qualify as forced heirs. With limited exceptions explained below, a forced heir may not be deprived of that portion of the decedent's estate.
Under Louisiana law, there are several instances which constitute just cause for purposes of disinheriting a forced heir. If just cause is present and if the formalities required by law are followed, an individual can disinherit one or more of his forced heirs. Additionally, if an heir is guilty of certain egregious acts towards the decedent which are defined under Louisiana law, he can be deemed to be an unworthy heir by a court and lose his right to inherit.
The proceeds or benefits of life insurance and qualified retirement plans payable to or for the benefit of a forced heir will be credited towards the satisfaction of his forced portion. Furthermore, his beneficial interest can be burdened by the usufruct in favor of the surviving spouse and still meet the forced heirship requirements.

What is a Living Will?
A living will is a document that allows for the withdrawal of life sustaining medical procedures in the event an individual suffers from an incurable injury, disease or illness with no reasonable chance of recovery. The condition must be certified to be terminal and irreversible by two physicians who have personally examined the person. The living will allows for the withdrawal of the life sustaining procedures where they would serve only to prolong artificially the dying process, and the person is permitted to die naturally with only the administration of medication or medical procedures deemed necessary to provide comfort care.
A standard Declaration is set forth in Title 40 of the Louisiana Revised Statutes and can be obtained free in most hospitals.

What is the Advantage of a Durable Power of Attorney?
A Durable Power of Attorney is a very important document but its use should be carefully restricted. The Durable Power of Attorney is intended to be an instrument whereby a person bestows on an agent the power to act for them in every conceivable capacity.
The Durable Power of Attorney is extremely useful in the event a person becomes incapacitated through an injury or becomes mentally incompetent, in that the agent can perform all actions on behalf of that person, to the same extent that person could have done for himself. It avoids the necessity of formal court proceedings to have the person declared to be mentally incompetent, known as an “interdiction, establishing a curatorship with a curator and undercurator requiring annual court filings.
On the other hand, the price you pay to avoid these painful and expensive court proceedings is that the power can be used at any time by the agent, without court supervision or the necessity of your being declared incompetent. Therefore, while a person has his full mental capabilities, the Durable Power of Attorney should generally not be recorded. Rather, it should be stored in a safe place with carefully limited access.

What is the Purpose of a Trust?
A trust is a legal relationship where a person called the grantor or settlor transfers property to another party called the trustee to hold and manage the property for the benefit of certain designated beneficiaries. A trust can be an effective tool in setting aside funds in a child's name for college without giving the child complete control of the funds immediately upon turning eighteen. The parents can be named as the trustees of these savings trusts for the children, as well as stand-by trusts in the event of the death of one parent. This will avoid the need for a cumbersome and expensive tutorship proceeding. A stand-by trust is a trust created to manage the inheritance of the children until they reach certain ages. The surviving parent can serve as the trustee with an institution or trusted individual named to assume the duties of trustee in the event of the death of the second spouse before the children reach certain ages.
Stand-by trusts can be amended or revoked at any time. Individuals with large estates can obtain estate tax savings by creating irrevocable trusts for their children and placing assets or insurance policies in the trusts during their lifetime.

Can I make gifts without being subject to Federal Taxation?
Annual gifts of up to $13,000 per year can be made to any person without incurring any gift tax or income tax. Furthermore, a gift of $13,000 or less in any one year will not reduce the applicable estate tax exemption. The person receiving the gift will obtain the same income tax basis of the donor.
Furthermore, each person has a $5,000,000 lifetime gift tax exemption that can be used in whole or in part at any time. Furthermore, all gifts to spouses enjoy an unlimited exemption from gift taxes.
There is no income tax to the donee or any income tax deduction for the donor of cash or property gifted.  However, if the gift is of property other than cash, and the donee sells the property, he will owe an income tax on the difference between the sales price and his income tax basis.  By way of example, if the donor paid $1,000 for 100 shares of ABC stock which now has a value of $10,000, the donee would keep the same income tax basis of $1,000, so that if the donee later sold the stock he would recognize a taxable gain in the amount of $9,000.
The annual tax free gift can be doubled to $26,000 if a spouse of the donor signs a consent form. Whether the property is community or separate makes no difference.
If the gift is made to a minor child, the Uniform Gifts to Minors Act can allow the property to remain legally in the name of the child while managed by the parent as natural guardian. However, if a trust is not used, the child has full access to the property upon obtaining the age of eighteen.
The annual gift and estate tax numbers are for calendar year 2011 and will change in future years.

How can I avoid the Federal Estate Tax?
Federal estate taxes currently begin where a decedent dies with a net worth of above $5,000,000. However, a properly drawn will can eliminate all federal estate taxes if there is a surviving spouse through the use of the marital deduction even if the estate was over a billion dollars.
In order to preserve the estate for the children, and minimize the taxes in the estate of the surviving spouse, spousal trusts known as Q-TIP Trusts can be used. It is even simpler in Louisiana if asset management is not an issue. The same tax advantages of a Q-TIP Trust can be achieved in Louisiana by adding three special words to a will, “usufruct for life”.
The federal estate tax numbers are for calendar year 2011 and may change in future years.

What is a Life Insurance Trust?
Spectacular estate tax savings can be achieved through the use of life insurance trusts which can keep all of the life insurance proceeds out of both the estate of the husband and the wife. Because of the large tax savings, strict rules apply with regards to the provisions of the trust, the duties of the trustee and manner in which the policy premiums may be paid.

What other Wealth Transfer Devices are there?
Many people think that estate and inheritance taxes are grossly unfair because a person is taxed on his income throughout his life. Then if he accumulates a large estate, it is taxed again at death. However the estate tax is, in many cases, a voluntary tax.
That is because there are so many ways to avoid estate taxes. Properly drawn wills and trusts can eliminate the estate tax where there is a surviving spouse. Where there is a taxpayer with no surviving spouse or a concern about the taxes in the estate of the surviving spouse, there are a number of wealth transfer devices that can be used. These include family corporations, family partnerships and private annuities.

What is the Process for Probate of an Estate?
The probate of estates can be a very simple and streamlined procedure in Louisiana. However, it does require the cooperation of all of the heirs and legatees in valuing the assets of the deceased and accounting for his debts and obligations.
An important result of the probate process is that the heirs and legatees are given an income tax basis in the assets that they receive, according to the value determined in the probate process.
This income tax basis will be the number used for determining gain or loss if an asset is later sold as well as the basis for depreciation, if an asset is used for business.

What is Guardianship?
Sometimes people suffer from diseases that impair their ability to understand financial or medical information or their ability to take care of themselves. In these situations, a family member or friend can ask a judge to appoint him or her to be a curator or caretaker for the impaired person, upon due proof of mental incapacity. When a curator is appointed by a judge, the ill person loses the right to make medical and financial decisions on his or her own. The curator now makes those decisions. The curator then is responsible to the supervising judge, who makes sure the curator acts only in the ill person's best interests and does everything possible to make the ill person comfortable, happy, and financially secure.
Another form of guardianship under Louisiana law is referred to as a tutorship for a minor. A tutorship is similar to a curatorship in that an individual is appointed to manage the affairs and person of another. Tutorships may be necessary where a minor child's parents have predeceased him or her. Additionally, a tutorship may be necessary if a minor is required to be a party to a contract because a minor's rights to obligate himself or herself under Louisiana law are severely restricted. In those situations, an individual who is above the age of majority must be appointed as the minor's tutor in order to act on his or her behalf. As in a curatorship, a tutor will be responsible to the supervising judge to make sure that the tutor acts only in the minor's best interests.
An under tutor must be appointed in a tutorship and an under curator must be appointed in a curatorship. Under both a tutorship and a curatorship, the representative's responsibilities include the filing of an annual account with both the under tutor or under curator and the court where the tutorship or curatorship was opened.

Who is Responsible for Payroll Taxes?
With certain limited exceptions, individuals or companies who have employees are required by law to withhold F.I.C.A. and income taxes from the paychecks of those employees. The employer is then required to remit these funds to the Internal Revenue Service or other taxing authority in a timely manner.
If an employer fails to withhold and remit these amounts to the appropriate tax authority, penalties and interest may be assessed. The additions of penalties and interest will increase the liability at a surprisingly high rate, making it extremely difficult for the employer to satisfy the indebtedness. If these taxes are not paid, the Internal Revenue Service can utilize its lien and levy powers to effectively close down a business. Additionally, the Internal Revenue Service has the power to assess any owner, director, officer or employee of the business which it considers to be a "responsible party" individually with respect to a portion of the payroll tax liabilities.
There are, however, certain actions which can be taken to keep the Internal Revenue Service at bay. If reasonable cause can be shown for the failure to collect and pay the withholding taxes to the Internal Revenue Service, the penalties which have been assessed can be abated. Installment agreements and offers in compromise are also viable alternatives which allow the business to continue its operations with little or no interference from the Internal Revenue Service until the tax debt can be satisfied. With regards to the assessment of individuals, there are numerous avenues to be explored in determining who are "responsible parties".