Trevor Kuresa is the sole proprietor of Hibiscus Legal, providing cost-effective legal counsel to business owners. Kuresa is currently the associate general counsel of Crumbl, where he is the subject matter expert for various legal and business matters, including contract negotiations and disputes, data privacy, intellectual property, international markets and acquisitions.
Russ Alan Prince: What is your approach to privately held businesses?
Trevor Kuresa: A privately held business generally has the same legal issues as a large multinational. The difference is that large multinationals usually have experienced in-house counsel to advise senior leadership. A privately-held business typically does not have the budget or the scale to hire an experienced in-house counsel. I bridge this gap by providing cost-effective legal counsel to successful business owners.
I work extensively with business owners, preparing to sell or sell their business. I advise business owners on tax, asset protection and estate planning. Finally, I provide general counsel services to business owners and their businesses.
Prince: What are some of your recommendations for successful business owners who are preparing to sell their businesses?
Kuresa: I recommend that business owners start with a legal audit. The purpose of the legal audit is to prepare all legal documents that will be requested by the buyer during due diligence and to identify and mitigate legal risks. Next, I encourage business owners to prepare a quality of earnings report. A quality of earnings report identifies key performance indicators, value drivers and operating inefficiencies. I believe that, prior to the sale, business owners should create a comprehensive wealth succession plan to manage, grow and protect their wealth while preparing the next generation to be responsible with their inheritance.
Prince: According to the research, many successful business owners still need to have asset protection plans. What do you recommend when it comes to asset protection planning?
Kuresa: Good asset protection plans will discourage a potential lawsuit before it begins or promote a favorable settlement. If litigation commences, then a good asset protection plan will isolate liability, place assets out of the reach of creditors, and persuade the creditor that any judgment obtained may not be collectible as a practical matter.
A good asset protection plan will be customized to each business owner, but I generally discuss the following strategies with all business owners. First, maximizing exempt property is beneficial because a creditor cannot seize exempt property to pay a judgment or debt. Second, owning assets in a family limited liability company, rather than in the business owner’s personal name, is effective because a family limited liability company has a separate legal identity from the business owner. Accordingly, a family limited liability company is not subject to the debts and liabilities of the business owner. A creditor of the business owner generally has no immediate means of collecting assets of the family limited liability company to satisfy the business owner’s judgment or debt. Finally, business owner’s should consider irrevocable trusts to own assets. Irrevocable trusts should be combined with a family limited liability company to diversify ownership of assets within the asset protection plan.
Prince: When it comes to tax mitigation, what are you recommending?
Kuresa: There are several strategies to reduce the income and capital gains that must be implemented before the sale. Business owners should consider the following three tax strategies.
Make the most of qualified small business stock. Gains from the sale of qualified small business stock are eligible for up to 100% exclusion from federal income tax up to $10 million.
Another tax strategy is to identify personal goodwill. This strategy allocates part of the purchase price in an asset sale to personal goodwill, which is taxed at long-term capital gain rates. There are two kinds of goodwill, corporate goodwill, and personal goodwill. Corporate goodwill is an intangible asset owned by the business. Personal goodwill is an intangible asset owned by the business owner. The business owner should allocate as much of the purchase price to personal goodwill as possible.
Finally, business owners should consider private equity transactions. The purpose of a private equity transaction is to defer recognition of capital gains tax from the sale of the business. This is an installment sale where the business owner recognizes capital gains on his tax return as installment payments are received, which effectively defers payment of the capital gains tax over the term of the installment.
Russ Alan Prince is the executive director of Private Wealth magazine and chief content officer for High-Net-Worth Genius. He consults with family offices, the wealthy, fast-tracking entrepreneurs and select professionals.