Blog Page - Randel Law, Inc., Your Business and Succession Planning Lawyer as well as Corporate Transparency Compliance

Exit Planning is a Misnomer

May 21, 2025 By Rick Randel

Rick Randel Exit and Succession Planning

I suspect the main reason many business owners put off exit planning is they don’t like the word “exit”. For many, their business isn’t just a job; it’s a huge part of their identity and their reason for getting out of bed every morning. So the word “exit” conjures up images of being put out to pasture, or facing a future with nothing to do but lie around the house or play golf every day.

But “exit planning” is really a misnomer. It’s not about leaving, it’s about building a stronger, more successful, transferable business. It’s about ensuring a smooth transition and the continuity of the enterprise you’ve worked so hard to build. And here’s the best part: engaging in this kind of planning almost always increases your company’s revenue and profits.

The Benefits of a Success(ion) Mindset
When you reframe exit planning as success(ion) planning, you unlock immediate advantages that benefit you and your business long before any actual exit. This proactive approach focuses on:

Building a More Valuable Business: Success(ion) planning identifies and strengthens your business’s value drivers. This includes hiring, training, and appropriately compensating key team members who can take on more responsibility, making your business less dependent on your constant oversight and more attractive to potential investors or buyers down the line.
Achieving Greater Flexibility and Work-Life Balance: Want to slow down, take a step back, and let others run the day-to-day operations and work the long hours? Success(ion) planning allows you to do just that, giving you more time for personal pursuits while still reaping the rewards of ownership. You can reduce your hours, take extended vacations, or simply enjoy less day-to-day stress without exiting the business.
Generating Liquidity When You Need It: Life happens. Whether you need to pay for college tuition, buy a vacation home, cover a parent’s skilled nursing care, or fund a trip around the world, success(ion) planning can provide options to fund those endeavors. This might involve selling a minority stake to a pre-designated senior manager or group of managers, giving you access to capital without giving up control or exiting the business.
Reducing Taxes: Bringing in your tax advisors as part of the success(ion) planning process can greatly reduce income and/or estate taxes, ensuring that more of the wealth you’ve built stays in your pocket to fund your retirement, or passes more efficiently to your loved ones, rather than going to Uncle Sam or the FTB.

Planning for Future Scenarios

While many benefits of success(ion) planning are realized while you’re still actively involved, it also prepares for those scenarios where you might, either gradually or suddenly, step away from the business. A comprehensive plan ensures continuity and minimizes disruption, no matter how or when that transition occurs:

Your Planned Retirement: For owners who do eventually decide to retire, having a well-crafted plan in place is invaluable. Think of how many business owners wait until after they’re burnt out, only to realize they now have to work another 2-5 years just to get their business ready for transition. Success(ion) planning prevents this stress, allowing you to transition whenever you decide to. You will have already groomed the next generation of owners who can buy you out and take over the business when you retire.
Leaving on Your Own Terms (or Not at All): Perhaps you decide to continue working indefinitely, even into old age. With a success(ion) plan, you’ll have a clear framework and a strong team in place to ensure that clients continue to be cared for, employees maintain their jobs, and your legacy remains intact.
The Unexpected Departure: We’ve all heard the tragic stories: owners who suddenly drop dead or suffer an incapacitating illness, leaving their spouse or unprepared employees to try to keep the business afloat. Those who have engaged in success(ion) planning have a contingency plan in place. This foresight ensures the business can continue smoothly, alleviating immense pressure on grieving family members, safeguarding client relationships, and protecting employee livelihoods. Even if you feel like it’s too much trouble, don’t do it for yourself, do it for them.

Plan for Success, Not Just an Exit

So maybe it’s time we stop calling it “exit planning” and start calling it “success(ion) planning”. After all, “success(ion)” has the word “success” built right into it, and that’s precisely what this type of planning ensures: the ongoing success of your business, your legacy, and your future.

This post is not intended and should not be relied upon as legal or tax advice pertaining to any specific matter. You are encouraged to seek competent legal and tax counsel before proceeding with any transaction involving any of the matters discussed above.

Buy-Sell Agreements Funded by Life Insurance

October 31, 2024 By Rick Randel

You may have seen or heard references to a recent United States Supreme Court case called Connelly v. United States. I’ve seen blurbs implying that the case invalidates buy-sell agreements or life insurance funding of buy-sell agreements.

Nothing could be further from the truth. All the court said is that the value of life insurance proceeds is counted toward valuing the company for estate tax purposes, and the company’s obligation to purchase those shares is not an offsetting liability. A significant decision by all means, but not one that invalidates life insurance funding.

A brief explanation:

When a person dies, if their estate is worth over $13,610,000, it’s subject to a 40% estate tax. If the deceased owned stock in a company, the value of that stock is counted toward the value of the estate. The more the company is worth, the more the stock is worth.

What the Supreme Court said in Connelly is that if the company held life insurance on the deceased, the proceeds of the life insurance are counted toward the value of the company, but the company’s obligation to buy the person’s shares is not counted as an offsetting liability.

So buy-sell agreements are still valid, and life insurance to fund buy-sell agreements is still valid. The issue is that in some situations, a buy-sell agreement funded by life insurance could trigger or increase the amount of estate tax that is paid.

Connelly only applies to cases where the estate of a deceased shareholder is so large as to trigger the estate tax. From now through 12/31/25, that amount is $13,610,000. Even though that amount will probably go down after 12/31/25, Connelly will still only apply to a small subset of buy-sell agreements.

Also, Connelly only applies where the company is obligated to purchase the shares (sometimes called a “redemption”). It does not apply where the other shareholder(s) are required to buy the shares (a “cross-purchase”). In that case it’s the shareholders who take out insurance on each other, so the insurance proceeds are not counted as an asset of the company in determining the value of the shares.

Therefore, high net worth business owners whose buy-sell agreement calls for the company to buy the shares should consult with their tax and estate planning advisors about switching to a cross-purchase arrangement where the other shareholders buy the shares. Let me know if you need an introduction or would like my help in working with your other advisors to design a solution.

Thanks,

Rick Randel

Legal Alert: Corporate Transparency Act court ruling

May 9, 2024 By Rick Randel

Rick Randel Mergers and Acquisitions and Succession Plans for Financial Advisers

Updating my recent post on the Corporate Transparency Act (CTA), many of you may have heard that a federal court in Alabama recently ruled that the CTA is unconstitutional. The National Small Business Association (NSBA) and one of its members sued for an injunction prohibiting FinCEN from enforcing the CTA. The court ruled that the CTA is unconstitutional because it exceeds the constitution’s limits on Congress’s authority.

Many people think the court’s ruling means they don’t have to file reports under the CTA. However, the court’s ruling is limited to the plaintiffs in that case. FinCEN has appealed the decision and announced that all other companies subject to the CTA are still required to file beneficial ownership information (BOI) reports. You can find FinCEN’s announcement here.

So if you are not a member of the NSBA, prudent practice is to comply with the CTA. This means filing a BOI report within ninety days after forming any new entity, and filing a BOI report by 12/31/24 for any entity that was in existence on 12/31/23. Feel free to contact me if you need any help filing your report or have any questions regarding whether you are exempt from the CTA.

I will continue to monitor this situation and keep you updated. Thanks,

Rick Randel

The Impact on M&A of the New Noncompete Law

February 29, 2024 By Rick Randel

You may have received one or more well-meaning email blasts trumpeting what sound like massive changes to California’s law on noncompetes. Some of the emails imply that now, as a result of these changes, noncompetes are unenforceable in California. In my opinion, these emails have overstated the extent of the changes. Especially in the context of mergers and acquisitions (M&A).

The basic law regarding noncompetes in California has not changed: no company can prevent a non-employee from competing, other than in connection with the sale of a business. But the seller of a business can still agree not to compete with the buyer. That hasn’t changed.

The new law basically does three things:

It clarifies that noncompetes in the employment context are unforceable regardless of where the agreement was signed or which state’s law supposedly governs the contract.
If an employer tries to make an employee sign an unenforceable noncompete, that’s a civil violation and the employer can be fined.
Employers who have made employees sign unenforceable noncompetes in the past must notify the employees that the noncompete is unenforceable.

Although the February 14 deadline for notifying employees has passed, it’s probably still a good idea to notify employees, to show a good faith effort at compliance. A late notice is better than no notice, and may prevent the company from being fined or at least reduce the amount of the fine. If you believe that your company may have made employees sign unenforceable noncompetes, you should reach out to your company’s employment law attorney about sending the required notices.

I hope this clarifies this new law regarding noncompetes. Thanks,

Rick

Corporate Transparency Act

December 6, 2023 By Rick Randel

In October of 2022, I sent out an early warning that Congress had adopted the Corporate Transparency Act (CTA), which will require small, privately held companies to report information about their ownership to the federal government. Because the CTA takes effect on January 1, 2024, I thought now would be a good time for a reminder and some updates about the CTA. You can see my earlier post here.

The agency enforcing the CTA is the Financial Crimes Enforcement Network or FinCEN. Initially FinCEN stated that companies formed on or after January 1, 2024, would have thirty calendar days after formation to file their initial BOI (beneficial owner information) report with FinCEN. More recently, FinCEN extended the reporting deadline from thirty days to ninety days. Companies in existence on 12/31/23 will still have until 1/1/25 to file their initial BOI report.

Although there have been some lawsuits filed to prevent FinCEN from enforcing the CTA as unconstitutional, the prudent course of action is to assume those challenges will not succeed. Here is a short list of the actions you should be considering:

• Determine whether your company is required to file BOI reports
• Alert your clients and contacts about this new requirement
• Rewrite your corporate documents (and tell your clients to rewrite theirs) so that investors/owners/officers/directors agree to provide the required information to the company (and any changes thereto), and consent to the company submitting that information to FinCEN
• If you or any of your clients invest in or are an officer or director of numerous companies, consider obtaining a “FinCEN Identifier” so you only have to provide your sensitive information one time directly to FinCEN, and not to every company in which they hold shares or are an officer or director.
• If you hear someone talking about forming a new company in the next few months, tell them to consider forming the entity by 12/31/23 to buy an additional year before they have to file their first BOI report (but synch up with their tax advisor to avoid triggering a tax filing or payment for 2023).

Click here to go to FinCEN’s landing page for the Corporate Transparency Act, where you can find further links to useful information such as FAQ’s and a compliance guide. For a more complete summary of the CTA, see the following outline:

What it is:

The Corporate Transparency Act (part of the Anti-money Laundering Act of 2020), a law passed by the United States Congress to prevent drug dealers, terrorists, and other bad actors from laundering their ill-gotten gains in the U.S. by hiding behind shell companies. The law requires small, privately held companies to report “beneficial ownership information” (BOI).

Who enforces it:

The Financial Crimes Enforcement Network (FinCEN) of the Department of the Treasury.

Which entities must file reports:

Basically any legal entity formed by filing articles or a similar document with a Secretary of State or similar agency (e.g. corporations, LLCs, and limited partnerships). However, 23 types of entities are exempt from filing BOI reports, including:

• Publicly traded companies
• Highly regulated companies e.g. investment advisers, broker-dealers, insurance companies, banks, etc.
• Tax-exempt entities e.g. 501(c)(3)s
• Privately held companies that have:
(a) Over 20 FT employees in the US
(b) More than $5,000,000 annual revenue, AND
(c) A physical office in the US.

Note it’s the entity itself that must file BOI reports with FinCEN, not the individuals whose information is being reported.

When reports must be filed:

• Entities already in existence on 12/31/23: by 1/1/25
• Entities formed on or after 1/1/24: 90 days after formation
• All entities: within 30 days after a change in previously reported information (including addition of a new individual who must be reported)

Individuals who must be included in the report:

Any individual who exercises “substantial control” over the entity, including:
• Senior Officers (probably includes managers of most LLCs)
• Anyone who controls the appointment of senior officers or election of a majority of the board (note members of the board of directors are not specifically included)
• Anyone who directs, determines, or has substantial influence over important decisions made by the entity (which probably does include directors of most small companies)
Any individual who owns or controls 25% or more of the entity:
• There are extensive rules regarding what counts as an ownership interest and how to calculate the percentage. Non-voting stock is counted. Unexercised options are counted.
• Only individuals are to be reported, whether they own their stock directly in the reporting entity or indirectly through a parent entity. Parent entities are not reported. But if an individual owns stock in a parent entity that indirectly adds up to over 25% of the reporting entity, he or she has to be included in the report. For example, individuals A and B in the below diagram would be reported, but neither parent nor individual C or D would be reported:

3. For entities formed after 12/31/23, any “Company Applicant”, which means any individual who:
• directly filed the document that created the entity; or
• was primarily responsible for directing or controlling the filing of the document that created the entity.
The regulations are unclear for many scenarios (this is another reason to consider forming a new entity prior to 12/31/23).

Information that must be reported:

• The individual’s full legal name
• Date of birth
• Home address (their residence, not their office)
• Unique identifying number from passport, driver’s license or similar government ID
• An image of that document (i.e. a pdf or jpeg)

FinCEN is required to keep the information confidential and only use it for its own law enforcement purposes or only disclose to specified other law enforcement agencies for specified purposes.

An alternative is for individuals who anticipate being included on many different entities’ BOI reports to go directly on FinCEN, submit the information only one time, and obtain a “FinCEN Identifier” to provide to each entity, rather than giving their home address and a picture of their driver’s license or passport to numerous entities.

How to file reports:

• Online in a portal being set up by FinCEN
• Format initially proposed by FinCEN was highly criticized
• FinCEN working on a new format

Penalties for willful failure to file or filing incorrect information:

• Monetary fine of up to $10,000
• imprisonment for up to two years, or
• both

Resources:

FinCEN website: https://www.fincen.gov/boi

FinCEN FAQs: https://www.fincen.gov/boi-faqs

FinCEN fact sheet: https://www.fincen.gov/beneficial-ownership-information-reporting-rule-fact-sheet

FinCEN compliance guide: https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide_FINAL_Sept_508C.pdf