Annual Fee Payments and Information Updates:

Maintaining your business entity in Texas starts with ensuring all annual fee payments are up to date and that your company’s information accurately reflects any recent changes.  This process is not merely administrative but foundational to your business’s legal and operational health.  It involves a detailed review and potential update of addresses, management structures, or business operations.  This step is crucial as it lays the groundwork for legal compliance and smooth business functioning.  It requires careful attention to detail, a thorough understanding of state requirements, and a systematic approach to reviewing and updating records.  At a minimum, corporations and LLC’s (business entity/s) must hold and document one annual meeting of the Officers and one annual meeting of the shareholders/membership each year. Consider consulting professionals to ensure nothing is overlooked.

Managing the Governing Bylaws or Operating Agreement:

This is part of your annual meetings for officers and shareholder/members.  The Governing Bylaws or Operating Agreement of your business entity sets forth the rules and procedures for internal governance, including management structure and financial arrangements. Changes within your business entity, such as shifts in membership or management roles, necessitate updates to this agreement.  This step is about ensuring that the operating agreement remains an accurate, current reflection of how your business entity functions and is governed.  It’s a task that requires internal consensus, legal knowledge, and strategic foresight.  Properly maintaining this document ensures that all members understand their rights and responsibilities, helping to prevent conflicts and confusion.

Appointing a Registered Agent:

Selecting a reliable registered agent is a legal requirement in Texas and a critical step in maintaining your business entity.  This agent is your business’s official contact for all legal and state communications, including service of process and tax notifications.  The choice of a registered agent is strategic and significant, as they ensure that you receive important legal documents promptly and keep your business compliant with state laws.  For businesses with home offices outside Texas, many services provide a registered agent to meet this requirement.  This step is about securing a dependable intermediary between your business and the state, ensuring that you remain informed and responsive to legal matters.

Filing Business Privilege Tax Returns and Annual Reports:

Annually, your business entity must file Business Tax Returns by April 15th.  These documents are critical in providing a comprehensive overview of your financial and operational status, helping the state assess taxes and verify compliance.  This process requires a meticulous compilation of financial records, an understanding of your business activities over the past year, and often consultation with financial advisors to ensure accuracy and completeness.  It’s a step that underscores your business entity’s transparency and accountability, affecting your legal standing and financial health.  Late submissions can result in penalties, emphasizing the importance of timeliness and precision in this process.

This step goes beyond simply issuing payment; it involves a deep understanding of your financial obligations to the state, which can vary based on factors such as income and assets.  It requires careful financial review, planning, and budgeting to ensure all obligations are met fully and on time.  Misunderstandings or under payments can lead to penalties, making it crucial to allocate sufficient time and resources to this task.  This step is not just about financial compliance but about strategic financial management and planning for your business entity’s future.

Maintaining State Records:

Your business entity’s involves updating any changes in your business entity, such as modifications in ownership, address, or management.  This must be reflected in an updated report to the state.  This step is about ensuring that your business’s legal document accurately represents its current structure and operations.  It’s a task that requires a keen understanding of how structural changes impact your legal obligations and an attention to detail in documenting those changes.  Keeping this information current is essential for legal transparency and operational clarity.

Handling Licenses and Permits:

Depending on the nature of your business and its location, various licenses and permits are required to operate legally.  This step involves identifying, obtaining, and regularly renewing all necessary licenses and permits.  It’s a task that requires staying informed about local, state, and federal regulations and understanding how they apply to your business activities.  Regular reviews and renewals are necessary to avoid lapses that could lead to legal troubles or business interruptions.  This step is critical in maintaining the legality and integrity of your business operations.

Registering a Business Entity with a Doing Business As Form:

If your business operates under a name different from its legal name, registering a ‘Doing Business As’ (DBA) name is necessary.  This step allows your business the flexibility to engage in the market under a name that best suits your brand or operational focus. It involves understanding the state’s requirements for DBA registration and maintaining this registration as needed.  While it doesn’t change the legal structure of your business entity, it’s an important aspect of your business’s public identity and marketing strategy.  Proper management of your DBA ensures that your business can operate and be recognized under its preferred name.

Navigating the complexities of maintaining an corporation or LLC in Texas can be challenging.  Seeking professional consultation is a crucial step in this process.  Whether it’s legal advisors, financial experts, or business consultants, professional guidance can provide clarity, ensure compliance, and offer strategic insights for your business’s growth and stability.  This step involves identifying the areas where professional advice is needed, selecting the right experts, and integrating their recommendations into your business practices.  It’s an investment in your business entity’s compliance, stability, and future success.  Leveraging expertise helps you navigate complexities and make informed decisions, ensuring that each step in maintaining your business entity is well-informed and strategically sound.

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Incapacity isn’t just about catastrophic accidents or permanent disability. It can be temporary. It can come in the form of a long recovery after surgery, a cancer diagnosis that takes you out of the office for months, or even an extended leave to take care of a family emergency. The bottom line is this: if you can’t be there, your business still needs to function.

The Real Risk of No Plan

As a business owner, you wear a lot of hats. You oversee operations, make the big decisions, manage key relationships, and keep the business financially afloat. So what happens when you suddenly can’t be in the office for an extended period?

Without a clear incapacity plan, the absence of leadership can create confusion—and fast. Employees might not know who’s in charge. Decisions could be delayed or made by the wrong people. Worse, family members involved in the business may assume they should step in, even if they’re not the best fit.

A lack of structure during your absence can lead to internal power struggles, operational breakdowns, and even financial loss.

What Incapacity Planning Looks Like

Incapacity planning is an extension of good estate planning. It’s about protecting your business during your lifetime—not just after you’re gone.

Here’s what a solid incapacity plan should include:

A designated decision-maker: Someone who knows the business, commands respect, and can make tough calls when you’re unavailable.

Clear communication: If your family works with you, set expectations early. Being related doesn’t automatically make someone the best person to lead.

Legal authority: Make sure your chosen backup has the legal power to act on your behalf—this often includes creating a durable power of attorney or incorporating provisions into your business operating agreement.

Operational systems: Document key processes, vendor contacts, passwords, and protocols. If you’re out, someone needs to step in seamlessly.

Why Family Isn’t Always the Best Fit

Many business owners assume a spouse, sibling, or child will take the reins if something happens. But that assumption can be risky. Family members may not have the right experience, temperament, or relationships to lead the business effectively. And assuming they’ll step up—or that others will accept them in the role—can cause unnecessary tension or confusion.

Choosing the right person means thinking about what your business actually needs to stay stable in your absence, not just who’s closest to you.

Build a Plan Before You Need One

At the end of the day, estate planning isn’t just about preparing for death—it’s about protecting what you’ve built during your lifetime. For business owners, that means thinking beyond succession and addressing incapacity head-on.

If you haven’t created a plan for who leads your business when you can’t, now is the time. We can help you identify the right person, create the necessary legal documents, and build a plan that protects your employees, your income, and your peace of mind.

Consulting with professionals who understand business operations when estate planning will provide peace of mind, knowing that your legacy is secure and your wishes will be honored.  Therefore, see an attorney with business and estate planning experience.  They should be able to work with you, your financial planning team and accountant to create the best plan.

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Lawyers across the country are sending notice to their clients that they, along with millions of other business owners in the country, are now required to submit Beneficial Ownership Information (BOI) to FinCEN’s new database.

Beneficial Ownership Information (BOI) for the entity will include the entity’s name, address and tax identification number.  BOI for each owner in the entity will include the owner’s name, current residential address, date of birth, either driver’s license or passport number, and a copy of the current driver’s license or passport with a clear picture of the person.  The disclosure requirements for owners only apply to individuals that excercise substantial constrol over the entity, or who own at least 25% of the entity.  After submitting this BOI in an intial report, the entity will need to update the report anytime provided information changes (like an address).

The deadline to submit BOI to FinCEN depends on when the entity was formed.  Entities formed after January 1, 2024, must submit complete information within 90 days of the formation date.  Entities formed before January 1, 2024, must submit complete information by January 1, 2025.

Failure to comply with the CTA can result in civil penalties up to $10,000.00 and/or up to 2 years imprisonment.

This law represents a dramatic change for business owners.  You will likely have questions.  The best source for information is FinCEN’s frequently asked questions page www.fincen.gov/boi-faqs and FinCEN’s Small Business Compliance Guidewww.fincen.gov/boi/small-entity-compliance-guide.  FinCEN is still making adjustments to its requirements, so their official FA page is the best place to get the most current guidance.

As a policy, most law firms will not upload BOI on behalf of clients.  FinCEN has designed an online portal to submit information quickly and conveniently, see www.boiefiling.fincen.gov.  The portal is designed well enough for non-attorneys to submit their information without difficulty.

If you do not wish to submit the BOI reports yourself, my recommendation is to use a corporate service or registered agent service company.  PLEASE BE AWARE THAT THERE ARE MANY COMPANIES OFFERING TO SUBMIT BOI REPORTS AND SOME OF THEM ARE FRAUDULENT SCHEMES TO STEAL YOUR PERSONAL INFORMATION.  Therefore, it is recommended that you use only companies with an established record of providing corporate services.

As with any legal matter, if you have questions regarding the Corporate Transparency Act, you should consult an attorney familiar with business entity law.

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Deciding whether to incorporate:    

In deciding what type of organization you want to do bs under, there are tax & nontax considerations that should be discussed with your attorney and tax professional.

Non-tax Considerations:   

The shareholder-owners are NOT PERSONALLY LIABLE for the Corporation’s debts.  This means shareholder’s losses are limited to their investment in the stock.  In general, shareholders may freely transfer their ownership rights to others (i.e., sell out).   The legal existence of a corporation is perpetual unless a shorter term is stated in the Articles of Incorporation.   Under corporate statutes, a corporation is to be managed by, or under the direction of, a board of directors.  A corporation can raise capital, not only by making or borrowing it, but they can sell stock.

Tax Considerations:   

In considering whether or not to incorporate, the effects of DOUBLE TAXATION should be considered.  Double taxation is the result of the corporation being taxed on its profits and the shareholders being taxed on their disbursements.  One can eliminate Double Taxation by i) not becoming a corporation but a Partnership instead; or ii) becoming a SUB S Corporation.

How to incorporate:

The first step is to prepare the Articles of Incorporation.  The person who prepares these articles must be over the age of 18 and is referred to as “the Incorporator.”  The articles must contain the name of the corporation, the corporation’s purpose and its duration along with several other requirements.  The incorporator must file the Articles of Incorporation with the Secretary of State.  Upon the issuance of the certificate of incorporation, the corporation’s existence shall begin, and such certificate shall be conclusive evidence that all conditions precedent to be corporation have been complied with.  After the corporation gets its Certificate of Articles of Incorporation, then it shall hold an organizational meeting of its Board of Directors.  A corporation shall not transact any business or incur any indebtedness until it has received for the issuance of shares consideration of the value of at least $1000 consisting of money, labor done, or property.

3 Entities that make up Corporation.  They are as follows:

Shareholders   – Provide the cash.

Directors         – Are in charge of

the management.

Officers           – Lead by the CEO, are charged with implementing the plans of Corporation in order to reach its goals.

Many people opted for corporate status because of the Limited Liability associated w/it, and thus the only risk was your initial investment.

Generally, shareholders are protected, but in rare circumstances there may be a time when parties go beyond a corporation & make the shareholders liable.  This is known as piercing the corporate veil.  Not only can shareholders be “shielded” from liability, but a Parent Company can be as well “shielded” as well from the liability of its subsidiaries.

The formation of a corporation or limited liability company is done primarily for liability purposes, but there are estate planning and tax concerns as well.  If you are thinking of starting a new or have an existing business, then you should consult with a tax advisor and attorney.  These professionals can help you determine what is the best form of entity for your particular business.

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A partnership is an association of two or more persons to carry on as owners of a business for profit.  What does “carry on” mean?  It is the operation as an ongoing business.  The partnership does not have to actually make a profit and if it does the profits do not have to be equally shared.  However, the partnership must have an agreement to share profits to be valid.  If there is no such agreement, then no partnership.  The partners making up the partnership can be secret, silent or dormant partners.  A secret partner actively participates in the partnership affairs, but his association is generally unknown.  A silent partner is one whose status as a partner is generally and publicly known but does not participate in the management of partnership affairs.  A dormant partner is one whose association with the partnership is generally unknown & who takes no part in the management of partnership affairs.

There is no specific format or formalities that are necessary in order to create a partnership and it may be created without any form of written instrument.  While no written instrument is required you may have one.  The partnership relationship is highly fiduciary in nature.  The partners dealings with each other are subject to the same scrutiny and imputations as transactions with any ordinary trustee/beneficiary relationship. This requires the utmost degree of good faith and fair dealing.

Generally, a partner is not entitled to compensation (i.e., a salary) for his services to the partnership, no matter how valuable his services may be.  Compensation comes instead from their share of the profits.

The general rule on liability is that every partner is an agent of the partnership for the purposes of its business and the act of every partner.  All partners are jointly and severally liable for the actions and debts of the partnership.  Any person not a member of the partnership may hold the partnership liable for any loss, injury or penalty resulting from where a partner commits any wrongful act or commission.  Additionally, once the partnership assets are depleted in payment of its debts, the personal estates of the partners may be looked at for satisfaction of the partnership’s obligations.   When one partner dies in a two-person partnership, this ends the partnership.  This can leave a dilemma if the partnership owns real estate or debts.   Furthermore, there are certain actions that require agreement between all of the partners to be valid.  As with any rule there are exceptions to this.

Next week I will discuss and describe some of the aspects of a corporation and why that might be the choice of your business entity.

Sam A. Moak is an attorney with the Huntsville law firm of Moak & Moak, P.C.  He is licensed to practice in all fields of law by the Supreme Court of Texas, is a Member of the State Bar College, and is a member of the Real Estate, Probate and Trust Law Section of the State Bar of Texas.

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First I will discuss the 2001 change. Effective September 1, 2001, Senate Bill 198 amended the Texas Property Code regarding Contracts for Deed. This amendment applies to all contracts regardless of when they were entered into. Again, if you are currently in a contract for deed, the following changes apply.

Under the current law sellers now have to provide purchasers under a contract for deed a tax certificate from the tax assessor collector, proof of insurance coverage, and a current survey of the property. 

Further, the law now requires that a Seller’s Disclosure Notice be provided. Such notice must inform the purchaser of the following:

1) Whether or not the property is in a recorded subdivision ;

2) Whether or not the property has sewer service;

3) Whether or not the property has water service;

4) Whether the property has been approved for a septic system by the appropriate authority;

5) Whether the property has electric service;

6) Whether the property is in a floodplain;

7) Who maintains the roads;

8) Whether anyone else has an interest in the property;

9) Whether any individual or entity has a lien filed against the property;

10) The purchaser has the right to obtain a title abstract or title commitment to the property; and,

11) The purchaser has the right to purchase a title policy to the property.

Another important change is that the law now requires the seller to disclose to the purchaser, BEFORE the contract is signed, in a written statement, the price, interest rate, total amount of principal and interest that will be paid and the amount of any late charge. 

Failure of the seller to provide any of the notices mentioned would be a violation of the Deceptive Trade Practices Act. This could nullify the contract, subject the seller to penalties of up to $500 per day, and subject the seller to treble (triple) damages and attorneys fees for the violation. 

Another important change affects the cancellation of the contract in the event of default. In the past the law required written notice be by either mail or personal delivery to the purchaser. The law now requires the seller to give written notice by certified or registered mail, return receipt requested.

Under the old law, the amount of time a purchaser had to cure the default varied depending upon what percentage of the purchase price had been paid. This ranged from 15 days to 60 days. The law now provides that purchasers have 60 days to cure the default. 

Perhaps a more significant development is related to what court has jurisdiction when there is a default under a Contract for Deed or a Lease with Option to Purchase. Historically, these matters were handled in the Justice Courts (i.e., by the Justice of the Peace) as a forcible entry and detainer suit. However, in Ward v. Malone, 115 S.W.3d 267 (Tex.App.-Corpus Christi-Edinburg 2003, pet. denied), the court held that in order to determine the right to possession, issues of title would have to be resolved; the Justice Court lacked jurisdiction to proceed with forcible entry and detainer actions because such actions involve the issue of tenants at sufferance; and, determining who has the right to possession and issues of title. Thus, suits involving Contracts for Deed, and possibly Leases with Option to Purchase, must be filed in District Court. 

It seems obvious that our legislature and courts want to discourage the use of contracts for deed and to protect purchasers under such instruments. This legislation and case law places a huge burden on the seller under a contract for deed with some very substantial penalties for non-compliance. These actions may very well do away with the use of contracts for deed. 

If you have sold or purchased property under a contract for deed, then you should consult an attorney to see how these changes may have affected your rights and duties.

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Both heart and mind must be working well if the owners of a new small business are to experience success. While it is only human nature, not to mention fun, to indulge one’s imagination about what a new business started from scratch could be like, would-be entrepreneurs need to engage in some cold, hard thinking and planning before taking the plunge. At the risk of pouring cold water on some of the anticipation and excitement, what follows is a guide for how to plan for and think through the many decisions that must be made well before you have that “Grand Opening” sign made.

Why?

This may seem obvious, but you should know just what your reasons are for wanting to start a new business. If the motivations are weak, odds are the business will be a bust, but well-founded reasons can help a business persevere through good times and bad. Some common reasons for starting a new business include escaping the whole 9-to-5 routine (though it may be replaced by an 8-to-8 routine), answering to no one else, upgrading your standard of living, and being convinced that you can provide a needed product or service.

Why Me?

Let’s face it, not everyone is cut out to be a captain of industry, or even captain of a small business. Maybe you need not subject yourself to an intensive psychological and life-experiences evaluation, but be honest with yourself about whether you have the necessary characteristics, skills, and experience.

A few examples give you the idea:

Can you make yourself pull the trigger on an important decision?

Do you see competition as exciting or just stress-inducing?

Are you willing and able to plan ahead?

Do you like interacting with people you don’t know?

Do you have the perseverance, not to mention the physical stamina and health, to put in long hours if that’s what is needed to make the business succeed?

Are you, and anyone else financially dependent on you, prepared to risk your savings in pursuit of the business dream if that’s what it takes?

Unless you are planning a one-man band of a business, are you comfortable with hiring, supervising, and possibly having to fire other people?

Are you reasonably well organized?

Do you know anything about the paperwork and legal side of running a business, such as payroll and accounting, the permits or licenses you will need, or the regulations and laws that may apply to the business?

Why This Business?

You may have the best motives and a skill set that would be the envy of any MBA graduate, but if there is no niche for your planned business, or, simply put, if not enough people will want to buy what you are selling, the new business will fail. The variables here include timing, location, and simply whether your business is feasible or practicable, so that you can be the one to fill that niche that you have first identified. Don’t make your business the equivalent of carrying coals to Newcastle.

In economic terms, you want to do some investigation to determine if there is some currently unmet demand for the product or service you want to supply. Then you want to meet that demand with a product or service that is competitive in quality, selection, price, and/or location. In short, learn as much as you can about the market you will be in. Learn who your customers will be and try to understand their needs and desires. Anticipate how your fledgling business will compare with any established competitors. What can you do in setting up and running the business to make sure you get your share of whatever market there is for your product or service?

How?

Turning the idea into bricks and mortar (literally or figuratively) involves a lot of decisions, some of which are best made only after getting professional advice. Still, you should acquire at least a layperson’s understanding of the pros, cons, and consequences of each decision.

Choose a name for the business that you find appealing, but also one that is informative for someone hearing it for the first time. Select the most appropriate business form, such as a sole proprietorship, a partnership, or a corporation. Investigate which local, state, and federal laws and regulations will apply to the business. This will run the gamut from laws of universal application (e.g., taxes) to laws specific to your business.

Make an unflinching and detailed examination of your financial picture. How much do you have now, how much will you need to start the business, and how much will you need to stay in business? Projecting cash flow into the future means taking into account such variables as seasonal trends in sales, the amount of cash taken out of the business for personal expenses, whether and when to expand the business, and the rate at which customers will pay off accounts if credit is extended to them.

Find a location for the business that is convenient for customers, appropriate in size and configuration, and zoned so as to allow your type of business. When you have settled on the product or service you will sell, calculate the inventory you should create and maintain and locate reliable suppliers.

Finally, if you go to all the trouble and expense involved in creating a small business, don’t forget to think about protecting against losing the business from such threats as fire, theft, robbery, vandalism, and liability for an accident. This means taking measures to provide security, but also arranging for the appropriate types and levels of insurance.

There are several excellent local resources to assist you with starting a business, the Small Business Development Center at Sam Houston State University, your local banker, financial advisor, CPA, the Chamber of Commerce, insurance agent and an attorney who is well versed in the formation of business entities.

Sam A. Moak is an attorney with the Huntsville law firm of Moak & Moak, P.C. He is licensed to practice in all fields of law by the Supreme Court of Texas, is a Member of the State Bar College, and is a member of the Real Estate, Probate and Trust Law Section of the State Bar of Texas. www.moakandmoak.com

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While telecommuting has been around awhile now, we live in a whole new world thanks to Covid19. Many folks are working from home until they can return to work. Of course, some speculate working from home is the new normal. Today’s column relates to the telecommuter and their rights should they be terminated.

Maxine worked in New York for a financial information services provider. When she moved to Florida, her employer agreed to allow her to telecommute. Maxine was responsible for the same tasks that she had handled in New York, only now from her laptop in Florida she logged onto her employer’s mainframe computer each workday.

Two years into the telecommuting arrangement, Maxine’s company decided to end it. When she turned down an offer to return to New York, Maxine was without a job. She was denied unemployment benefits in Florida following a ruling that she had voluntarily quit her job without good cause. However, the Florida agency advised Maxine that she might be eligible to receive unemployment benefits in New York.

In what may be the first court decision of its kind on interstate telecommuters, New York’s highest court also ruled that Maxine was ineligible for benefits, but for a different reason. Under New York law, a threshold requirement for eligibility is that the employee’s entire service for the employer, except for incidental work, must be “localized” in New York. Maxine argued unsuccessfully that her services were localized in New York, at her employer’s mainframe computer, notwithstanding that she initiated this service on her laptop in Florida. The court ruled instead that the physical presence of the employee determines in which state a telecommuter is located. For work done while she was located in Florida, Maxine was not eligible for unemployment compensation in New York.

When the new economy met the old unemployment insurance system in Maxine’s case, the court stayed with principles that predate the age of computers. The outcome was dictated by two rules that are uniformly recognized: All of an individual’s employment should be allocated to one state, which should be solely responsible for paying benefits; and that state should be the one in which it is most likely that the individual will become unemployed and seek work.

Unemployment has the greatest economic impact on the community in which the unemployed individual resides, and benefits generally are linked to that area’s cost of living. Legislators and judges from previous generations could not have foreseen today’s world of interstate telecommuting and the pandemic, but the rules they created are still valid. For better or worse, Maxine was tied to Florida, where she was physically present, and she could not look to New York for unemployment benefits.

You may be like me and know someone in a similar situation as Maxine. As we venture further down the pandemic road, these types of employment situations will become more common. However, if you or someone you know is telecommuting, they should consult any attorney about their risks. While our laws will change and catch up it is prudent to consult an attorney to find out where you stand now.

Sam A. Moak is an attorney with the Huntsville law firm of Moak & Moak, P.C. He is licensed to practice in all fields of law by the Supreme Court of Texas, is a Member of the State Bar College, and is a member of the Real Estate, Probate and Trust Law Section of the State Bar of Texas. www.moakandmoak.com

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I have handled many sales or purchases of small businesses. Therefore, I thought this week I would discuss the subject of selling a small business.

The transfer of ownership interests in a small business should take into account all of the considerations that make each business, and especially a family-owned business, unique. The vehicle for accomplishing the transfer is usually called a buy-sell agreement. Its name barely begins to describe the buy-sell agreement’s various purposes. With professional advice, the agreement can be tailored to meet the objectives of each small business, whether the business is in the form of a close corporation, partnership, limited liability company, or some other structure.

By creating a market for the ownership interest of a shareholder who has retired, become disabled, or died, a buy-sell agreement insures that such an interest can be converted into cash when cash is more important than having shares in the company. Since small businesses often pay out most or all of their profits in salaries, an equity interest in the business would be much less valuable if its owner was not assured of being able to sell that interest back to the business or to other shareholders.

When a triggering event in a buy-sell agreement causes the interest of one owner of a business to be purchased by other owners, or by the business as an entity, a critical issue is placing a dollar value on that interest. It is difficult to set a market value for shares in closely held corporations, whose stock by its nature has little or no liquidity. An agreement can set the price for shares according to a predetermined formula, value as shown on the company’s books, an appraisal by a third party, or some other method. In any event, it is important that the provisions on the valuation and purchase price of shares in the company be kept current.

A buy-sell agreement also may serve as an orderly method for maintaining control over the company despite a change in the composition of its owners. In a family-owned business, this may mean a clause in the agreement effectively keeping the business in the family by allowing remaining family members to buy the interest of a departing owner. For children who decide not to carry on in the business, cash, perhaps generated by life insurance on a senior owner, might be an alternative to inheriting part of the business.

A typical buy-sell agreement for a family business provides that, on the death or departure of one shareholder, the remaining shareholders have the right to purchase his or her shares. Those participating in the buyout usually acquire those shares in an amount commensurate with their holdings. An alternative could give the corporation itself the right to purchase the shares. However, this option may bring into play laws for the protection of creditors that limit the power of corporations to purchase their own shares. A hybrid approach sometimes used in buy-sell agreements allows the business to buy its own shares, only to the extent permitted by relevant statutes, but the remaining shareholders could then purchase any shares not acquired by the corporation.

Since one of the triggers for application of a buy-sell agreement is a shareholder’s death, shareholders should avoid conflicts between the terms of the agreement and their estate plans. When the terms of an agreement and a will cannot easily be reconciled, the odds increase for litigation, rather than the smooth transition for which the agreement was designed. If a will predates the agreement, it may be necessary to draft a new will that is consistent with the agreement. A less complicated approach is to amend the will with a codicil providing that business interests are to be disposed of according to the buy-sell agreement.

Consistency between an estate plan and a buy-sell agreement is important not only as to disposition of shares, but also as to voting or management rights in the company. A shareholder should determine whether his estate or heirs should have such rights, and then be sure that the documents accurately reflect the shareholder’s wishes. Similarly, a shareholder should consider whether limits on his executor’s voting rights are desirable, so as to avoid the possibility that the executor will act to frustrate the shareholder’s intent.

One purpose of any contract is to avoid future disputes between the parties by establishing rights and duties for future contingencies. Aside from dealing with the substantive issues raised by transferred ownership, a buy-sell agreement also can head off conflict, or at least help solve it, by providing for a form of alternative dispute resolution or mediation.
When buying or selling a business entity, you should consult with an attorney for help in protecting your rights and to insure a smooth transition.

Sam A. Moak is an attorney with the Huntsville law firm of Moak & Moak, P.C. He is licensed to practice in all fields of law by the Supreme Court of Texas, is a Member of the State Bar College, and is a member of the Real Estate, Probate and Trust Law Section of the State Bar of Texas.

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