Frederick Focke Mischler, Attorney

Buy-Sell Agreements

Small business owners often need special struturing to aid them in managing the transfer of the business to their business partners.  Business succession planning, of which buy-sell agreements are important tools, require some careful examination to be sure that the business survives the possible crises that can occur when an owner or key employee is suddenly unavailable to the business, often through sickeness or death.

Consider a small business with two owners, each with 50% of the business.  They know each other well and are confident in their relationship.  But this confidence does not extend to other people who might also know that industry well, nor does it extend even to the owners' family members.  At the same time, the business is a large part of the owners' personal assets and their lives.

A Buy-Sell agreement addresses the needs of these owners by allowing them the ability to get out of the business or to sell their stake in the business and obtain a fair value for that stake, while still protecting the other owner by preventing the sale of the business to new partners who do not have the confidence of the current owner.

Essentially, the owners agree that if one of them wants or needs to sell, an agreed mechanism will come into play that will value the business and set in motion the process of selling the business so the selling owner gets a fair share of the business and the remaining owner gets some control over how the business is sold.

Usually, these agreements will say that if an owner dies, becomes disabled, or desires to sell, the other owner or the corporation shall buy the stake of the selling owner.  These agreements are typically tied to insurance policies on the lives of the owners such that if one owner dies, the policy will provide the cash necessary to buy that owner's share of the company.

That way, the family of the deceased owner gets the value that the owner built in the company, and the remaining owner gets to have a company that he or she can control without having to deal with a new partner who might not be agreeable with that remaining owner.

As I indicated, these agreements are one part of a larger strategy of the business owners to protect the business, protect their families, and protect their estate.  If you are a business owner, be sure to consider these issues as you grow your company.

Trust Fund Recovery Penalties

If you own, or want to own, a business that has employees, you should know about this issue.  The Trust Fund relates to the employment taxes that employers withhold from their employees' paychecks.  It is a trust fund because the employer simply holds this money in trust for the employees until it is sent to the IRS to pay their taxes.  It is not the employer's money.  Ever.  And because it is held in trust, the employer can be held to fiduciary standards regarding the money.

So, if you are an employer, be sure to get the employment taxes withheld from employees' wages paid out to the IRS every month.  This is critical to your continued existence as an employer.

If this does not happen, then the penalty can be applied by the IRS.  The tax law gives the IRS the authority to go after any and every "responsible person" in order to collect the unpaid employment taxes that were not paid by the business.  If you are a responsible person in your business, you could be held personally liable for these taxes.  This is true even if you did not have direct day-to-day control or decision-making authority over the payment of liabilities in the business.

There is no "bright line" definition of who a responsible person is.  The IRS will look at various factors like who is active in the day-to-day management of the business, who has knowledge or control of the payment of liabilities, who owns the business, who has check signing authority, and who has knowledge or control of the hiring and firing of staff.  Sometimes these functions will be handled by a staff person.  Such people can also be held responsible even if they report to the owner or another person in the management team.