Although it is often hard to fathom an event that may not occur for many years, it is important to put plans in place in advance. The failure to do so could result in the eventual loss of the business. There are several factors you should keep in mind in making plans for the future of your small business.

1. Identify a successor(s). Many small business owners plan to transfer their business to a child or children, or sometimes, grandchildren eventually. If you have more than one child, it is important to consider which of them has an interest in stepping into your shoes, as well as whether that child has the skills needed to do so successfully. It is important not to assume that just because one child is the oldest, control of the business will go to that child. The continued success of the company requires that the member(s) of the next generation who will take over the reins have the business acumen and commitment needed to run it.

However, it also presents some challenges, particularly for small businesses. According to the June 2019 National Federation of Independent Businesses (NFIB) Jobs Report, small business owners identified the difficulty of finding qualified employees as their single most important business problem. Although 58 percent of small business owners indicated that they had hired or tried to hire employees, 86 percent found that there were few or no qualified applicants for their open positions. Nevertheless, there are some strategies that your small business can use to attract excellent employees, even in a tight job market.

1. Strive to offer competitive wages. Although it is difficult for small businesses to compete with the salaries offered by large corporations, as your business becomes more profitable, view your employees as an investment that can help your business continue to grow. Twenty-eight percent of small business owners surveyed in the June 2019 NFIB Jobs Report indicated that they are offering higher wages, which can help attract the most qualified employees.

2. Emphasize a potential employee’s opportunity for more rapid advancement. In a large company, an entry-level employee may have to advance through several positions before obtaining the level of responsibility that an employee of a smaller business will, out of necessity, obtain relatively quickly.

3. Stress employees’ opportunity to gain a wider range of experiences. In larger companies, employees tend to have more specialized jobs. In a small business, every employee is incredibly valuable and will likely be given a broader range of responsibilities and work experiences.

In some circumstances, the IRS allows you to take a bad debt deduction.

What Is Considered a Business Bad Debt?

According to the IRS, a business bad debt is considered a loss incurred from the worthlessness of a debt that was created or acquired in a trade or business or was “closely related” to your trade or business when it became partly or completely worthless. If your primary motive for incurring the debt was related to the business, the IRS will consider the debt to be closely related to the business.

The IRS provides the following examples of bad business debts: (1) loans to clients, suppliers, distributors, and employees, (2) credit sales to customers, or (3) business-loan guarantees. For small businesses, the most common bad debt arises from credit sales to customers.

If the circumstances indicate that your business has no reasonable expectation that the debt will be repaid, it will be considered worthless. Depending upon the relevant facts, this could be on the date the debt is due or even prior to that date.

You must be able to demonstrate that you have made a reasonable effort to collect what is owed to your business prior to being eligible for the deduction. What is considered “reasonable” will vary depending upon the type of business in which you are engaged. It is unnecessary to sue the customer if you can show that a judgment would be uncollectible. For example, if the customer has filed for bankruptcy, this is sufficient to demonstrate that your debt is uncollectible and therefore worthless (assuming it is an unsecured debt).

In fact, the Small Business Administration reports that the inability to obtain funding is one of the main obstacles that prevent small businesses from expanding their operations. To increase your business’s chances of obtaining much-needed funding, it is important to understand and establish business credit.

What is Business Credit?

Most people know that each individual has a personal credit score that helps lenders decide how likely a person is to repay a loan. Lenders use that score to determine whether to provide a person with financing—auto loans, home mortgages, or lines of credit—as well as the terms for such financing. However, many small business owners do not know that their businesses can establish a separate credit score—and that there are benefits to doing so.

What Are the Benefits?

According to the Small Business Administration, nearly half of small businesses use personal credit cards for business expenses. However, separating your personal credit from your business can protect your personal credit score in the event your business encounters difficulties in repaying a loan. Likewise, if your personal credit score is low, building a good business credit history for your company can be beneficial, opening up more opportunities for financing, as well as for obtaining better interest rates and repayment terms.

You are responsible for establishing an effective system to store and maintain your business records whether your small business is a sole proprietorship, partnership, LLC, or corporation. Some types of records will help you to keep track of business details and plan for your business’s future, but others are required by law. Here are some of the records your business may be legally required to keep.

Employee Records. If you hire employees for your business, local, state, and federal laws require you to maintain extensive and accurate payroll and personnel records.

• Payroll. Under the Fair Labor Standards Act, certain basic payroll records must be kept for three years for non-exempt (hourly) workers:

Don’t be complacent because your business is small: Almost half of all cyber attacks in the U.S. are directed at small businesses. In recognition of this serious problem, in August 2018, President Trump signed into law the NIST Small Business Cybersecurity Act, requiring the federal government to provide resources to assist small businesses in reducing their vulnerability to cyber attacks.

What Should You Do?

It is important for you to take steps to protect your business’s data, reputation, and customer and employee information.

The following actions are among the most important for small businesses to consider:

• Establish easily accessible cybersecurity policies for your company, include them in your employee handbook and offer periodic employee training on what you require. As an aside, employees should be required to take any necessary steps to protect customer and business data. Some additional common practices include:
• • separate user accounts for each employee,
  • strong passwords for all laptops, tablets, and smartphones, that are changed every three months,
  • prohibiting the installation of any software on to company computers without permission, and
  • limiting administrative privileges to key employees and IT staff. 

Now that you’ve completed the  first step—choosing a business entity—it is now important to prepare an operating agreement. The operating agreement is a contract which governs the operations of the LLC and sets forth the arrangements made among the members, including their rights and responsibilities upon the withdrawal of a member.  Although departure from the business may be the last thing on anyone’s mind, it is important to plan ahead. A non-competition, or non-compete, clause can help protect the company from harm inflicted if a former member decides to form a competing business.

What Is a Non-Competition Clause?

A non-compete clause protects business assets like goodwill, confidential information, and trade secrets by preventing the former member from using the knowledge gained while participating as a member of the LLC to compete against the LLC. 

If the operating agreement contains a non-compete provision, a former member can be precluded from engaging in a similar type of business directly or indirectly in competition with the LLC. If the operating agreement does not contain such a clause, the former member is free to compete with the LLC.

In addition, the non-compete clause may prevent the member from soliciting the LLC’s clients or customers for business. Usually, such provisions take effect after the relationship has ended, although they sometimes may preclude members from competing with the LLC during their membership in the LLC.

An individual or entity obtaining a membership interest as a result of an involuntary transfer usually cannot fully step into the shoes of the transferring member.

This statutory protection—often called a pick your partner provision—acts as a safeguard that provides LLC members with a certain amount of personal asset protection. For example, whereas the creditor of a corporate shareholder could reach and exercise shareholder rights to their full extent, the creditor of an LLC member can reach and exercise only the economic rights associated with membership interests—not the voting or management rights. The recipient of this type of membership interest is called an assignee.

Statutory Provisions – Creditor Action

If an LLC does not specify any transfer provisions, creditor actions are subject to state LLC laws. Each state, in its LLC statute, has provisions limiting what actions a creditor can take against an LLC member for personal debt. Depending on the state, the statutory remedies available to an LLC member’s personal creditors may include:

• A charging order, which is a court order requiring the LLC to pay all the distributions due to the member-debtor from the LLC to the creditor.
• A foreclosure on the member-debtor’s LLC ownership interest.
• A court order to dissolve the LLC. 

These remedies protect the other LLC members from the risk of having the creditor of a debtor-member step into the debtor-member’s place and share in the control of the LLC. To a varying degree, they also address the creditor’s right to satisfaction of the debt.

Part of this protection hinges on the restricted transferability of LLC membership interests.  Restricted transferability protects the non-transferring members from creditors and unwelcome new members, which upholds the integrity and value of the non-transferring members’ membership interests.

• Most (but not all) LLCs impose requirements or restrictions on the transfer of a member’s interest.
• If the LLC’s operating agreement is silent on the transferability of interests, you must look to state law to be sure there are no default provisions restricting transferability.

This article, part 2 in a 3-part series, focuses on voluntary membership interest transfers done with the intent to grant full membership rights to the recipient.

What if you get a divorce? What if you have creditors seeking immediate repayment? What can you do with your membership interests? The answer depends on how transferable those membership interests are.

A transfer of LLC membership interests can mean selling, donating, assigning, or gifting—basically one LLC member turning over his or her membership interests to another individual or entity. The transfer can be voluntary or involuntary.

• Examples of voluntary transfers include selling membership interests to a third party or to the remaining members, donating membership interests to a charity, or leaving membership interests to a trust upon death.

• Examples of involuntary transfers include those prompted by divorce, bankruptcy, and termination of employment.

The transferability of LLC membership interests is subject to competing interests.  On the one hand, freely transferable membership interests can be more attractive to members because they are easier to dispose of or cash out of—in other words, the membership interests are more liquid and marketable.