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Planning for Business Owners and Professionals. (Book Reviews).

Planning for Business Owners and Professionals, 7th ed., by Ted Kurlowicz, James F. Ivers III, and John J. McFadden, 1999, Bryn Mawr, Pa.: The American College

This seventh edition textbook is intended to be "a concise treatise" that covers the legal and tax planning issues faced by the owners of small, closely held businesses and independent professionals "in a manner appropriate for the Chartered Life Underwriter and Chartered Financial Consultant curriculum." The authors are all attorneys and professors of taxation at The American College. Business planning topics, such as the products or services to provide, financing the operation, marketing issues, or operational issues, are outside the scope of the text. The material covered is intended to "provide the financial services professional with guidance to assist the business owner." There are relatively few footnotes or links to statutes, case law, or IRS regulations. The text describes the topics but does not provide sample agreements, checklists, or even law and regulation citations. This book is not intended to make one competent to implement, develop, or resolve the various legal or tax issues discussed; to do so requires the skills of capable professionals such as an attorney or tax professional. However, it does provide an introduction to the various issues and describes many of the available options and choices that need to be made.

Chapter 1 covers common business problems and planning objectives. A small business owner has many decisions to make--organizational structure, compensation, and taxation among them. The authors systematically discuss many of the factors that should be considered in making the appropriate choices.

Chapter 2 discusses the forms an unincorporated business enterprise can take. The book covers both the traditional forms of business organization and the relatively new limited liability Company from a number of different viewpoints. Laws enabling limited liability companies (LLCs) have been adopted in all states to meet business owners' demands for liability protection, along with the flexibility of pass-through tax treatment for federal income-tax purposes. Costs to form an LLC will generally be higher than those for a general partnership or simple corporation. This cost differential may decline as attorneys become more familiar with LLCs and the legal research associated with their formation is reduced. Perhaps the most serious disadvantage cited for LLCs is the lack of a track record for such entities. There are few regulations, rulings, or cases on LLCs as entities.

The material covered by the text is important to the owner of a small business. Choice of form of business could expose the owner or protect him or her from ruin and bankruptcy. The taxation differentials are significant. Furthermore, some of the choices are difficult and expensive to change. In keeping with the text's introductory and instructional objectives, the authors have not burdened the reader with an overwhelming amount of detail. However, as a result, the text may not be sufficient to guide the financial services professionals they wrote the book to develop and train. For example, when the authors state, "Provisions of LLC laws vary greatly from state to state, thus making it difficult for a multi-state business operation to function," there is no table listing the specific statutory citations the reader would need to further investigate the law in his or her state. Perhaps in the future, the text will contain or refer to an analysis of state LLC laws. Some of the questions to be covered could inclu de:

* How many owners or "members" are required to form an LLC?

* What must be covered by the "operating agreement"?

* What is covered by the articles of organization?

* What are the state limits on an LLC association's possibilities?

* What are the key operating terms that are most significant in determining federal income tax treatment?

Interestingly enough, the authors do include such a list for closely held corporation statutes: "Typical provisions in the closely held corporation statutes are the following:

* Limits on the number of shareholders

* Limits on the duration of the business

* Elimination of the board of directors

* Operation of the business by the shareholders

* Provision for voting trust agreements

* Provision for shareholder agreements

* Provision for forced dissolution by a shareholder

* Provision for substantial restriction on the transfer of shares"

It is clearly beyond the scope of the text to make the reader competent to draft or file LLC paperwork. Not enough detail is here to guide the interested financial services professional to, much less through, the relevant federal and state statutes or regulations on a wide variety of topics. For example, the authors state, "Recently the IRS went further and issued regulations--the check-the-box rules--that generally eliminate entity tax classification testing for businesses that wish to be taxed as partnerships." As IRS regulations, these are common rules that apply across the country, so it is curious that the authors choose not to provide or discuss these specific IRS regulations. A financial services professional presuming to provide client advice and guidance on LLCs would appear to be better prepared if he or she had actually read the key regulations on this important topic. The closest the authors come to providing the detail needed for further investigation is a statement that the relevant statutes do exist: "Every state has statutes enabling the incorporation of a business within its jurisdiction." This pattern is repeated in the section on closely held corporation statutes: "A minority of states have adopted special provisions in their corporate statutes dealing with closely held corporations." Instead, the authors provide a warning but no guidance: "Financial services professionals should be aware that the laws of the state control the formalities of incorporating and operating a professional or closely held corporation."

Many students may find the details about or references to specific statutes and regulations unnecessary. But if the target audience is the prudent financial services professional seeking to learn about and provide guidance to clients on these issues, then the authors could go further. The financial services professional will ultimately have to say, "You need to consult with your legal and tax professionals on these issues." Unfortunately, the text does not provide the material to let a financial services professional say, "Here's a checklist of the items to consider and discuss and a starting place for state statute review."

Chapter 3 covers many of the same issues for corporations. In contrast to the text's treatment of LLC issues, the material on corporations is somewhat more complete: "Although the (organizational) formalities vary according to the statutes of the state of incorporation, the following are among the typical formalities required by most state laws:

* Preparation of pre-incorporation subscription agreements

* Prepare and file the Articles of Incorporation

* Prepare corporate bylaws

* Prepare a corporate minutes book, stock certificates and a seal

* Conduct organizational meetings and prepare minutes

* Issue stock certificates"

The discussion of various forms of organization and their respective taxation sets the stage for multiple discussions about income tax saving and estate planning opportunities for the business owner.

Chapter 4 contains a discussion of compensation planning in the closely held corporation. The reasonable compensation standard is discussed. Cash compensation, fringe benefits, cash bonuses, deferred compensation plans, and life insurance are among the topics covered. The authors discuss both qualified and nonqualified compensation plans. Finally, the life insurance discussion covers group term, executive bonus, and split dollar life insurance plans.

Chapter 5 focuses on problems in business continuation at the death of an owner. Following a discussion of the probate process, the authors discuss business continuation issues for each form of business from proprietorship to the closely held corporation. This is followed by a discussion of postmortem estate preservation planning topics. The options discussed range from liquidation to stock redemptions and recapitalizations.

Chapter 6 begins a long discussion of buy-sell agreements for unincorporated businesses. An unincorporated business or a partnership terminates at the death of the owner or a general partner, respectively. The proceeds from liquidation will probably be less than from the sale of a going concern. A properly designed buy-sell agreement will require the sale and purchase of the business for a prearranged price. The parties involved know with a high degree of certainty that the agreement will be carried out. The discussion proceeds to cover the benefits and contents of a buy-sell agreement. Finding the purchaser, structuring the agreement, and taxation are the major topics covered for proprietorship agreements. The issues in planning continuation for partnerships are similar in many ways. Various funding alternatives are covered next: savings funds, installment obligations, and life insurance. Finally, there is a brief description of the unique issues for LLCs.

Chapter 7 continues the discussion of buy-sell agreements, although this time the focus is on corporate agreements. The death of a shareholder in a closely held corporation does not terminate the legal structure of the business. However, the business may be dramatically affected. Once again, a properly designed corporate buy-sell agreement can solve many of the problems that arise from the death of a shareholder who contributed significant services to the corporation. The discussion continues to cover the benefits, contents, types of agreements, funding, and taxation issues involved for corporate buy-sell agreements.

Chapter 8 covers planning for stock redemptions. Many problems in financial and estate planning for shareholders in closely held corporations could be solved through redemptions of some or all of their stock. The primary focus of this chapter is on the taxation issues involved. Dividends versus capital transactions are discussed along with the rules governing the attribution of ownership. The objective is to provide an understanding of the basic elements of constructive ownership, which is particularly important for planners who deal with transactions involving changes in stock ownership in corporations owned by family members. Redemptions are sometimes overlooked as a means of transferring a controlling interest in a corporation. Among the issues covered are the termination of interest, transactions involving family members, and taxation.

Chapter 9 covers the disposition of a business interest. For most owners of closely held businesses, the value of the business is a large portion of their total assets. Withdrawing those assets through disposition of the business interest is a transaction that can be complex and must be done carefully. Tax considerations are significant. Planning a successful business disposition often requires the services of specialized lawyers, accountants, and valuation consultants. The chapter describes the basic issues in the disposition of a closely held business interest so that the financial services professional is aware of the planning options available.

Chapter 10 covers the issues involved in keeping a family business in the family after the death or retirement of the primary owner. Fewer than 35 percent of family businesses are successfully transferred to the next generation. The financial services professional is uniquely situated to assist the family businessowner in planning this transfer. This chapter discusses some of the advanced planning techniques that facilitate the transfer of an interest in a family business to younger-generation family members.

Chapter 11 discusses the valuation of a closely held business. The authors cite many deficiencies with book value, particularly on the asset side of the balance sheet. In their adjustments to book value, the authors allude to such GAAP adjustments as a bad debt reserve but never suggest a consultation with the owner's accountant. The discussion that follows covers the purposes, IRS guidelines, and methods used to value a closely held business. Because no single basic valuation formula is auditproof, the text covers methods that focus on business assets, methods that focus on earnings, valuation for buy-sell purposes, alternatives, hybrid approaches, and common valuation errors. Finally, the discussion covers issues surrounding the use of an appraiser.

Chapter 12 covers the planning issues associated with the disability of a business owner or professional. In 1984, about 81 percent of United State households had at least one member owning life insurance. The total number of individuals covered by some form of long-term disability income protection represents less than 20 percent of the U.S. workforce. A working individual is far more likely to sustain a disability of significant duration than to die prematurely. The problems created for the disabled person and his or her family are often greater, are more difficult to handle, and require more complex planning than does the continuation planning for an owner's death. This chapter aims to make the reader aware of the issues and to be able to advise business and professional clients of the options available.

Chapter 13 provides a brief discussion of some of the other risks faced by a closely held business. The discussion covers the loss of human and business assets, liability claims, and key non-owner-employees. The classic risk management techniques--avoidance, loss control, transfer, retention and transfer--are each discussed in turn. The chapter closes with a discussion of workers compensation, employers' liability, and key employee life insurance.

The primary focus of the text is planning for many of the risks facing closely held businesses, with particular emphasis on tax and continuation planning. The authors believe that the effective use of tax and continuation planning techniques will help owners of a successful business provide steady income and adequate appreciation potential. The owners of small closely held businesses, by necessity, focus their attention on the everyday operation of the business. However, the critical nature of risk planning dictates that the risk management function cannot be ignored. The authors succeed in covering a broad variety of tax planning topics at a level suitable for students interested in learning about the complex and dynamic pursuit of legal and tax planning for small, closely held businesses.
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Author:McKechnie, Ian M.
Publication:Journal of Risk and Insurance
Article Type:Book Review
Date:Dec 1, 2001
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