How Protected is Your Family Business from Creditors?

How Protected is Your Family Business from Creditors?

By Alexander A. Bove Jr.

This article first appeared in the Spring 2017 issue of Massachusetts Family Banker magazine.

Alexander Bove

Many family business owners become complacent about creditor exposure because they believe their corporate or limited liability company structure will protect the business. The fact is that if it is a corporation and you or anyone else owns shares in their own name, jointly with another, or even in a revocable trust, the answer is, it’s not protected. If it is held in a limited liability company (LLC), formed in Massachusetts or one of several other states with similar LLC law, the answer is, it’s not protected. Unfortunately, most business owners are far less familiar with the principals of asset protection than they are with how to build and maintain a successful business.

It is common knowledge, for example, that running a business in corporate form can protect the shareholders from liabilities of the business itself, but few stop to realize that the liability of a shareholder, especially a majority shareholder, can be satisfied by the assets held by the corporation. That is, a judgement creditor can reach the shares owned by a debtor and could exercise ownership of the shares.

If the shares represent a controlling interest in the business, the creditor can literally “take over” the business and run it (profitably or into the ground), sell it, or liquidate it. And don’t think that holding these shares in an estate planning trust helps. Such trusts are typically revocable by the “owner” and offer no protection whatsoever.

Many think an LLC will avoid this exposure, since the LLC laws protect the business from the debts of a member, and a judgement creditor may not become a member or vote the debtor’s interest, or look at the LLC books. Therefore, the LLC does offer somewhat of an obstacle, at least slowing the creditor down, but by no means does it offer true protection. The immediate protection it offers is a wall between the creditor and the assets held within the LLC. Unlike using control of corporate stock to reach the assets held in a corporation, a judgement creditor of a member of an LLC has no right to reach the assets inside the LLC.

But the “wall” does not make the judgement on the debt go away. Despite the wall, a determined creditor could conceivably acquire the debtor/member’s interest in the LLC, depending on the circumstances and the governing state law. The first remedy of a creditor of a member of an LLC is to obtain a “charging order” against the LLC interest. This is a court order directing that any payments that are to be made to the debtor/member must be paid instead to the creditor until judgement is satisfied.

In some states, including Massachusetts, if it looks like the LLC is stalling or contriving to circumvent the court’s order, the court can order a foreclosure (forced public sale) of the debtor/member’s share, causing the interest to be lost entirely (unless, of course, the LLC pays the creditor). Thus, even under the “better” of the two possible outcomes the debtor/member’s share of the profits is cut off until the debt is paid. This is not asset protection. Under the “worse” of the two outcomes, the creditor could purchase the debtor/member’s interest at the foreclosure sale and just sit with the interest until distributions are made or until the LLC is sold.

Asset protection begins with a careful review of the family’s interests, circumstances and objectives, with a view towards protecting assets from creditors without giving up benefits or control. And it must be noted that any such plan will require a considerable move from the status quo and the introduction of new documents into the family plan. It will also typically require re-titling of major assets. Once this small hurdle is overcome, the business owner would see that there are ways to retain control over a company without exposing ownership of the company to creditors; and there are ways of protecting children’s and grandchildren’s company interests and other assets from their creditors; and there are ways of passing the baton without passing the exposure.

To accomplish such objectives requires not only a careful and expert structuring of the underlying entities, having in mind the family’s immediate, intermediate and long-term objectives, but also recognition of the need for, and ways to develop, flexibility. Even the best current plan can be subsequently handicapped or rendered vulnerable to creditors by unforeseen changes in the family, such as divorce or disability, a change in the law or a change in the nature of a major asset. Flexibility must be built into the plan, as well as provisions for a periodic monitoring of the plan to consider ongoing family developments, objectives and changes of any sort that might affect the plan.

Alexander A. Bove Jr. is a partner in the Boston office of Bove & Langa, an estate planning and asset protection firm. He is adjunct professor of law, emeritus, of Boston University Law School Graduate Tax Program. He may be reached at

Estate Planning for the Family Business Owner Requires Special Knowledge

By Kenneth P. Brier

This article first appeared in the Fall 2016 issue of Massachusetts Family Business magazine.

Estate planning is never more challenging than when it’s for the owner of a family business. Such planning is fundamentally different from planning for other individuals, so the one-size-fits-all standard estate plan is virtually certain to fail the owner’s needs.

Why the Standard Plan Will Fail

Worst is the unplanned estate. Everyone has an estate plan, whether you realize that are not. If not planned by you, the government has a standard plan for you.

Only slightly better is a “standard” lawyer-draft estate plan. Though it may be sophisticated in a generic sense, it may well fail to address the critical issues of business owners. For example, passing S corporation stock on to trusts of the kind commonly provided in the “standard” estate plan will blow the corporation’s S election.

Finally, even a well-executed estate plan, sensitive to special business issues, can fail if it is out of date. Personal and financial circumstances often change. And applicable state and federal laws have been in a continual state of flux.

 Four Precepts for Planning for the Business Owner

I boil the special attributes of estate planning for the business owner down to four precepts: one, think globally; two, face succession or face extinction; three, deal with liquidity issues; and four, divide, discount and conquer.

Thinking globally: There is never a clear dividing line between planning for the business owner and planning for the business. If a business owner does not like the currently available choices, he or she often has the ability to change the menu. For example, an owner, unlike a rank-and-file employee, can amend an existing retirement plan to obtain further options or terminate it and adopt a whole new plan. To avoid making a taxable gift, I have sometimes suggested that an owner transfer business opportunities to the children, rather than the whole business. The owner can set the children up in a new company, primed with contacts and know-how and poised to grow at the expense of the old one.

Facing succession issues: Every business owner needs to pay attention to succession issues, addressing the orderly transfer of ownership, responsibility and control of the enterprise upon eventual retirement, disability or death.

Lifetime transfers, often made in conjunction with the founder’s winding down or retirement, can promote an orderly transition. Ownership, responsibility and control need not be vested in same person. Those attributes can be separated by, for example, issuing non-voting stock or hiring professional managers. The owner needs to determine whether the stock will be gifted or sold, and if the latter, whether within the family or to an outside party. A common issue is how to deal with several children, only one of whom works in the business. Does that child get all of the shares? If an unequal distribution, should the other children’s inheritances be evened off with other property? The owner needs to exercise special care in the choice of personal representatives and trustees. Who will have the ability to run the business until an orderly disposition can be made? A buy-sell agreement can address many of these issues.

Dealing with liquidity issues: The government still extracts a sizeable estate tax from any large estate, and it wants payment in cash, not stock, within nine months from the date of death.

Often neither the business owner’s estate nor the business has enough cash of its own to pay the tax bill. Borrowing is only a temporary expedient. But cash that is otherwise unavailable can be generated through life insurance. Though it is not free, it does provide a tax-advantaged way to pre-fund the cash needs and make cash available exactly when it is needed. Whether or not there is insurance, either the estate or the business commonly will have to sell assets to a third party, often a life insurance trust.

A buy-sell agreement can come into play as a liquidity vehicle, prescribing in advance the arrangement whereby the estate will sell its shares to the party with the cash, usually derived from an insurance policy. If the sale is made to the company, it is a redemption agreement. If the sale is to the other owners, it is a cross-purchase agreement.

Divide, discount and conquer: Transferring interests in closely-held businesses at the least tax cost commonly has involved various strategies to suppress value. This is done by carving the business up into various minority interests, or more generally, restricting the individual owners’ rights in the business interests. The premise is that the sum of the parts then does not equal the whole. These techniques are often labeled as creating discounts, though the term “discount” in many respects is a misnomer, because you really do need to affect the current value of the individual owner’s interest. There are two kinds of basic discounts that may apply, namely discounts for lack of marketability (illiquidity) and minority interest (lack of control).

Strategies to divide and discount got a substantial boost in 1993 through the IRS’s issuance of a revenue ruling retreating from its position of aggregating family interests for valuation purposes. Neither Mom’s stock nor Daughter’s stock was now to be considered in determining whether or not Dad had a controlling interest. In fact, even if Dad did have a controlling interest, he might carve off a smaller piece and give it away as a minority interest.

The IRS since then has since waged a rear-guard campaign to combat such discount planning, especially as it extended to non-operating family limited partnerships and LLCs. This counteroffensive has recently culminated in new proposed regulations on valuation discounts for intrafamily transfers of business interests, seeking to breathe new life into 1990 tax legislation providing for the taxation of certain lapsing rights and the disregarding for valuation purposes of certain restrictions on liquidation. It remains to be seen whether these controversial proposed regulations will be finalized in something like their present form and what effect they might have on an operating businesses.

Kenneth P. Brier is a partner of Needham-based Brier & Ganz LLP, a boutique law firm focusing on tax, business, estate-planning and wealth preservation matters.

Education Counts in the Cyber Wars: Prevention Begins on the Homefront

Education Counts in the Cyber Wars: Prevention Begins on the Homefront

By Konrad Martin 

This article first appeared in the Fall 2017 issue of Massachusetts Family Business magazine.

Konrad Martin

News of global cyberattacks have businesses, institutions and individuals on edge. People understand just how serious a threat it is. The percentage of middle market businesses now carrying some form of cyber liability insurance has jumped dramatically in the last decade. 

While insurance is important, prevention is preferable. Businesses should do everything possible not to find themselves in the position where they need to use the insurance they have wisely purchased. 

Famous last words: If you have anti-virus and anti-malware software, the last thing you need to worry about is a virus infecting your computer, right? Wrong. Hackers don’t sit at home thinking they can’t get around the latest virus and anti-virus protection and give up. They are extremely sophisticated and clever criminals that continue to create new ways to trick you. They make a fortune by stealing your information. So even though you have the latest anti-virus protection (which you should!), they are already figuring out ways to trick you into inviting new viruses and malware into your system. 

The best anti-virus protection is only as good as the team using it. 

Two specific threats are widespread in the business world: ransomware and spear phishing. By staying educated on these technological scourges, you should be able to identify and avoid them. 

Ransomware is just as it sounds: a virus that infects a system through an unsuspecting user clicking on an attachment will start looking for data to encrypt. Once it does, that data can only be unencrypted with a private key, held by the hacker who holds that information ransom. Typically, the hacker will request the ransom payment in bitcoins (a form of cybercurrency), and because the payments are usually a relatively small amount, it tends to be easier to pay the ransom than restore all the files from backup. 

Spear phishing is a new twist on an old trick. A phishing email tends to ask questions that seem benign, or the message tries to entice you into clicking on an attachment that supposedly includes information about package tracking or an IRS refund. Spear phishing is a technique where the email appears to come from someone you know, usually in an authoritative position, telling you to transfer funds or click on an attachment. To the recipient of the email, the email looks legitimate. However, the email is actually coming from criminals using a technique to capture the boss’s email and then, for example, request that tens of thousands of dollars be transferred to fictitious bank accounts. Once that money is transferred, it is almost always gone. Or the case where “the boss” asks an employee to send him several dozen W2s. Then, once done, that opens a Pandora’s box of legal and financial problems for the company and the people whose information has been breached. 

There is no magic anti-virus protection that can cover all dangers. The best protection a business can seek is through education, supported by awareness, training and policies. End users must know that even the most innocuous email, website, Facebook post or article can contain a virus or malware. 

Read carefully before clicking – and if there is the slightest doubt, don’t do it! Usually, there is something that seems out of place. The grammar is a little off, you were not expecting a refund from the IRS, or you haven’t ordered anything that you need to track. With awareness, training and effective policies, something in a hacker’s attempt will usually jump out at you. That is how to prevent these nasty viruses and malwares from locking up your systems and costing you thousands and thousands of dollars in downtime and ransom money. 

Here are a few steps that you can take as a business owner to lower the risk of being hacked.

  • Tell your employees that if an email looks even mildly suspicious, do not open. Forward to your IT department for evaluation. 
  • When in doubt, call the person you believe the email is from and ask “Did you send this?” 
  • Develop strong passwords for your company. Far too often people use passwords like “123456” or “letmein” or “password.” Hackers know the common ones; yours should have a variety of characters, including symbols. 
  • Consider a cloud-based data protection system to supplement a strong password policy. There are companies which will do this for you for a reasonable monthly amount. 
  • Avoid “free” offers. They are potential trouble. 
  • Develop and enforce a strong policy regarding employees using their personal devices. Whether that’s a tablet, a home computer or a phone, every device connected to the company infrastructure offers hackers an opportunity to get inside. If you do allow employees to use their own devices, you have the right – and the obligation – as an employer to tell them what they can and cannot visit and access. 
  • Train your employees. Partner with a strong IT consultant who is knowledgeable and can spend time with your employees to help them identify and avoid threats to your infrastructure. 
  • Consider running vulnerability assessments against servers, workstations and networking equipment to ensure risks from vulnerabilities are mitigated. 
  • Have a strong backup system for data, in the cloud. 
  • Be sure that your Written Information Security Plan is up to date and that your employees are familiar with what they can and cannot do.

Education is key. Knowing that there are threats out there and how to recognize them will save your company both time and money – and help you do what you do best: running your business without interruption.

Konrad Martin is CEO of Tech Advisors, with offices in Medfield and Boston. 

The Keystone for Successful Baby Boomer Succession

By Stanley H. Davis and Kelley R. Small

This article first appeared in the Summer 2017 issue of Massachusetts Family Business Magazine.

If you are or have been the parent of a teenage child, you may have read the book “I Hate You, But Will You Please Drive Me and Cheryl to the Mall?” by Anthony E. Wolfe. You probably got a chuckle out of the title, but after reading it, found it totally relatable. Raising children is always a push-pull relationship; however, in the final analysis, we love our children and will do almost anything for them – including turn over the family business. 

Thousands of businesses are owned by the Baby Boomer generation and they are finding themselves asking one of the largest questions of their careers: “Who is going to take over the family business?” 

Your business is like your child. In many cases, you have given birth to it, you have fed it, nurtured it, been angry at it, loved it and despised it. In the end, it is like a piece of you and you cannot imagine leaving it permanently. Perhaps you would like to take a long vacation from it, keep your hand in it, but never leave it completely. After all, it is part of the family. 

Whether you have inherited or started your own business, you have likely heard the question, “What is your exit plan?” It is one we ask our clients on a regular basis. It is not an easy question to answer and can be especially vexing for owners of family-held businesses, where few seem to have a solid exit strategy in place. Typically, business owners fall into one of these categories: 

  1. I feel my plan is solid and I can walk away today with a strategy in place. 
  2. My son or daughter will take over after s/he graduates from college. 
  3. Once I hire the right people, I will be able to take more time off and it will run itself. 
  4. I need to bring in someone to run the business until my son or daughter is ready to run it. 

Warren Buffet is famous for the expression, “the lucky sperm club,” when it comes to the inheritance of a family business. But are inheriting children really that lucky? A successful parent-owner can be a hard act to follow. The pressure on the next generation to do things as their parents have done or to take the business to the next level is immense. 

Given this, it’s worth making a careful assessment to determine whether your child wants – or  equally important, whether your child is the best person – to take over your business. As you consider this, to potentially give your business’s future a leg up under the leadership of the next generation, have your son or daughter precede their entry or return to your business by spending some substantive years in another well-run business. The education and perspective they can achieve will be reinvested in your business and will further their own exposure to different career opportunities not bestowed on them simply because of their lineage. Ultimately a smart, interested and talented offspring won’t be good at everything; running your business may be one of those things. 

Alternatively, they may self-select out of consideration. In these cases, as a business owner, you may have a very painful decision to make – whether to engage a non-family member to take the helm. If you give this decision the time and energy it deserves, you may conclude that by turning to a more skilled leader you’ll be favoring your business, your employees and your community, not to mention your children’s inheritance and your own legacy. 

On occasions when it becomes obvious that the leadership reins of a company should not – for whatever reason – be handed down to the next generation, we’ve worked with owners who have determined that their best (or only) option to sustain their enterprise was to recruit the right successor. We’ve also worked with a number of families who opted for a strategy to simultaneously elevate performance, position the business for eventual sale, and provide a leadership asset for the acquirer. 

The natural life cycle of Baby Boomer-owned family businesses has them all now facing the wave of leadership and ownership succession. The difference for this generation is the resources that have emerged to help sustain their business legacy, plan for their personal wealth and consider their own next adventure. A keystone asset will be the right leadership for the business and the times. That leadership will optimize business performance, maximize the attractiveness for an acquirer and be an asset toward the longevity of the enterprise. 

The right leader to sustain and position each business will underpin the best outcomes within the flood of Baby Boomer successions. Selecting that leader may be one of the biggest and most important decisions you, as the business owner, have left to make.

Stanley H. Davis and Kelley R. Small are principals of Standish Executive Search LLC, an executive search advisor to mid-size and smaller companies positioning for accelerated growth, change or succession. For more information, please visit