The new requirement for companies to comply with the Corporate Transparency Act (CTA) prior to year-end has caused many business owners to ask what other housekeeping work they need to do. All company owners need to maintain the company’s organizational records and governance documents as one step toward reducing liability exposure and having a clean bill of health.
Moreover, a successful business could struggle or not survive a transition if a succession plan is not in place at the time of an owner’s disability or death. The following questions are a guide to determine whether one or more actions should be taken to improve the “health” of your company, including completing the CTA filings prior to year-end.
Governance and Management
- Are the company’s organizational records and governance documents up-to-date? Do they reflect the company’s current owners, officers, directors and managers? Most company governance documents (e.g., bylaws, articles and operating agreements) require a formal appointment for officers, directors and managers.
- Does the company consistently conduct meetings of its management team and/or owners? If so, does the company maintain written minutes? The protection offered by a corporate or limited liability structure is bolstered by holding annual meetings of the owners and management team. If there are important decisions affecting the company, such as a large sale of company assets or a change in the company structure or operations, the owners and management team should hold special meetings to affirm those decisions. Meetings should be documented with minutes maintained in the company records.
- Does the company maintain a current stock ledger or its equivalent? It is critical that the company keep documentation showing current owners and any transfers of interests.
- Does the company have an updated buy-sell agreement? If so, are the management team and owners complying with its provisions? A buy-sell agreement often prescribes whether certain types of transfers of ownership interests are permitted, any consent requirements and any options granted to other owners.
- Is the company’s registration information current with the Secretary of State and any other applicable licensing or regulatory organizations? Annual filings are typically required and failure to file could result in the dissolution of the entity.
- Is there a strategic plan in place for the business? If so, has it been recently reviewed to ensure it is still consistent with the goals and objectives of the company and its owners? Our clients find it helpful to periodically review the company’s overall strategic plans and goals, set benchmarks and identify areas for improvement and opportunity.
- Is the company compliant with the CTA? The CTA federal law requires most entities to file information about the owners and others who have substantial control over the entities. Given the recency of the CTA, we devote a section to this topic below.
Ownership and Succession
- Do all of the owners have estate plans? Do those plans utilize revocable trusts to maintain privacy and avoid probate at death? An owner can reduce legal expense and transfer delay, for both the family and the company, by holding ownership interests in a trust.
- Have the owners developed succession plans that will eventually transition the company in an effective and tax-efficient manner? If the transition will be to children, have the needs and roles of children who are active in the business versus those who are not active been identified and provided for? Have the owners considered selling the company to an outside buyer or to key employees?
- Do the estate plans, buy-sell agreement and business succession plans work together to achieve the owner’s goals? These documents impact how the ownership and operations of the company will be handled during the owner’s lifetime, during incapacity and after death, and must work together to achieve the desired result.
- Is there a plan to minimize estate tax liability upon an owner’s death? The federal and state estate tax regimes allow for some exclusions, but those are often inadequate to allow the business to pass to others without transfer tax. An owner should periodically analyze the amount of tax that will be due upon the owner’s death, as well as planning strategies that could be implemented to reduce tax exposure.
- Is there a plan to create liquidity upon an owner’s death to pay estate tax? Taxes and expenses at death can burden the business interests and other assets of the estate and should be provided for in the estate and succession plan.
- Do the management team and key employees know what to do upon an owner’s unexpected disability or death? We recommend that our clients run a “fire drill” to see how the plan would be implemented after the owner is gone. Seeing how the plan might or might not work can provide guidance regarding where further planning is needed, such as training key employees, informing successor owners about operations or finances or implementing a vendor/vendee communication plan.
CTA Compliance
- What are the reporting requirements under the CTA? The CTA is a new federal law effective January 1, 2024. The CTA requires some entities, including corporations, LLCs and partnerships, to file information about (1) the “reporting companies” themselves, (2) the “beneficial owner(s)” of the reporting companies, i.e., any individual, directly or indirectly, who (i) owns “25% or more ownership interests” of the reporting companies, or (ii) has “substantial control” over the reporting companies, and (3) the “company applicant(s)” of the reporting companies, if the reporting companies were formed on and after January 1, 2024.
- What are your potential obligations under the CTA? You need to understand if any entity in which you have ownership interests or over which you have substantial control is a reporting company or if it is exempt from the reporting obligations. You should also identify the beneficial owners of any reporting company for which you are obligated to submit a beneficial ownership information report (BOIR), be aware of the corresponding due date for filing the BOIR (which is fast approaching), and arrange to file the BOIR accurately and timely.
Contact your Lathrop GPM attorney to discuss how to improve the “health” of your company related to the required CTA filings or anything else.