by: Begley Law Group

 By: Thomas D. Begley, Jr., Esquire, CELA 

When a law firm is established, whether it is a solo or small firm, the immediate concern is generating enough income to pay expenses and to provide for the lawyer and/or lawyers and their families.  As early as possible, lawyers should start to think about their future.  The years pass quickly and action taken early on pays huge dividends down the road.


Three lawyers are in practice together.  Their LLC was formed 15 years ago, at which time certifications were filed with the Division of Revenue and Enterprise Services, an operating agreement, including buy-sell provisions, was signed, a certificate of ownership interest was issued, and all basic LLC formalities were followed.  The operating agreement provides a cross-purchase arrangement, which stipulates that, in the event of the death of one of the parties, the remaining lawyers will purchase from the deceased’s estate that party’s interest in the practice.  The agreement provides that the purchase price will be $40 per share and that the price will be reviewed every three years.  Since the LLC was formed, the lawyers have not reviewed the buy-sell provisions of the operating agreement or revisited the $40 per share price, and they have failed to hold annual meetings.  No provision has been made for disability or retirement. 

One of the lawyers now has cancer and has spent much of the past year in treatment that has left him incapacitated and unable to practice law.  The lawyer has stopped receiving his salary from the LLC, and his wife, acting as his agent under a general durable power of attorney, has decided that he should exit the practice.

She approaches the other lawyers to attempt to withdraw her husband from the LLC.  The operating agreement does not apply to cases of disability.  The two remaining lawyers agree to buy the third lawyer out at $40 per share, even though, at the time of the lawyer’s incapacity, the LLC’s net worth was about $200 per share.  The incapacitated lawyer has mounting medical expenses and limited investments outside of the LLC.

The LLC did not purchase disability insurance on any of the members. 

Since the operating agreement fails to adequately provide for the terms of the buyout, litigation is required to resolve the dispute. 


When the LLC was formed the law firm discussed establishing a retirement plan for all of its employees, but deferred actually setting up the plan and funding it until later. The senior partner in the firm is now 60 and later has never come.  How will the senior partner provide for himself and his family once he is no longer willing or able to work? 


When starting any business, it is important to plan for both the management of that enterprise and its eventual transfer to a successor. With the guidance of an experienced attorney and other professional advisors, business owners need to:

  • Choose an appropriate business entity 
  • Choose employee benefits 
  • Develop a succession plan 
  • Coordinate that succession plan with their personal estate plans 
  • Obtain the necessary insurances 


Insurance for law firms should include the following: 

  • Malpractice insurance 
  • Long-term disability insurance 
  • Medical insurance 
  • Dental insurance 
  • Eye care insurance 
  • Life insurance, including life insurance to fund a buyout and, for solo firms, to provide for the lawyer’s family in the event of his or her premature death. 
  • Employment practice liability insurance.  This is to insure against claims based on improper employment practices by the firm.  One wonders if Jeffrey Epstein would have been covered. 
  • Worker’s compensation insurance 
  • Contents insurance 
  • Commercial umbrella insurance 


Many lawyers plan on working a long time.  Solo practitioners and members of small law firms are often able to do this, because they do not have mandatory retirement rules that larger firms have.  However, declining health and burn out frequently interfere with these plans.  It is important that retirement plans be established as early as possible.  Because of the time value of money, the funds initially used to establish the retirement plan grow considerably over time.  Let’s assume that a lawyer begins practice and establishes a retirement account at age 25 and retires at age 70.  Let’s further assume that the investment earnings over that 45 years equals 6%.  Over 45 years the initial investment would grow rapidly.  So, if lawyer Joe invested $10,000 in a retirement account at age 25 and retired at age 70, the initial $10,000 investment would be worth $102,857.18 on the date of retirement.  Investments in a retirement account should be made regularly, and should include not only the lawyer but other members of the firm’s staff.

It is very important that a qualified investment manager be retained to manage the retirement account.  Many lawyers think they have the necessary expertise to manage the money themselves.  They are reluctant to pay the professional money manager.  A good professor money manager might charge 1.4% to manage the money.  A good money manager will certainly earn more than 1.4% over and above what the lawyer self-managing the account would earn.


♦ What Type of Business Entity is Best for the Business? One of the first steps a business owner must take is to decide on a suitable business entity.  Each type of entity has advantages and disadvantages, and the right choice for a particular business will depend on a variety of factors.  In particular, a business owner should ensure that the chosen entity will allow for adequate management and control, both today and in the future.  The entity selected should enable the business owner to maintain control for as long as desired and to transfer the business at the chosen time, according to his or her wishes.

An experienced attorney can assist the business owner in choosing an appropriate entity and in considering its impact on estate, gift, and income taxes. Business entity choices include the following:

  • Sole Proprietorship 
    • Advantages: Simplicity and control 
    • Disadvantage: Liability 
  • Corporation 
    • Advantages: Limited liability; potential tax benefits; ability to retain or transfer control 
    • Disadvantages: Filings required; possibility of double taxation with an ordinary corporation 
  • Limited Liability Corporation 
    • Advantages: Limited liability; potential tax benefits; ability to retain or transfer control 
    • Disadvantage: Filings required 
  • Partnership 
    • Advantages: Limited liability; potential tax benefits; ability to retain or transfer control 
    • Disadvantage: Filings required 
  • Limited Liability Partnership 
    • Advantages: Limited liability; potential tax benefits; ability to retain or transfer control 
    • Disadvantage: Filings required 

♦ What Documentation is Required for a Business Entity? Certain documentation is required for most business entities. 

  • Entity Selection. After a business entity has been selected, appropriate documentation must be filed with the state office having jurisdiction over the enterprise.  A sole proprietorship is not required to do this, but should consider filing a fictitious name certificate. 
  • Internal Documentation. Depending on the type of entity chosen, a business must have internal documentation, such as an operating agreement, a partnership agreement, or by-laws.  These documents should not only provide for the day-to-day management of the business, but also include a succession plan with provisions such as a buy-sell agreement. 
  • A Buy-Sell Agreement. This is an agreement between or among business owners as to how the business will be valued and what will happen in the event of the death, disability, or retirement of one of the owners.  A buy-sell agreement should address:
    • Issuance and endorsement of shares, membership certificates, or partnership units 
    • Restrictions on transfers 
    • Determination of valuation 
    • Mandatory purchase at the death of the shareholders 
    • Optional purchase upon termination of employment for reasons other than death. 
    • Stock pledges 
    • Personal guarantees of corporate obligations 
    • Modification and termination of the agreement 
    • S corporation status 
    • Miscellaneous provisions 
    • Provisions relating to life insurance 
  • An Employment Agreement. This stipulates the compensation and duties of a business owner employed by the business entity.  The agreement also should address:
    • Vacations 
    • Termination 
    • Employer’s authority 
    • Records 
    • Expenses 
    • Reimbursement of disallowed compensation and expenses 
    • Military service and disability 
    • Term 
  • Medical Reimbursement. If the business entity adopts a medical reimbursement plan, an agreement to that effect should be prepared. 
  • A Written Succession Plan. A business plan should include a succession plan that provides for how the owner will leave the business either at retirement or upon his or her death or disability.

♦ What Team Should a Business Owner Develop? From the onset, a business owner should develop a team of professional advisors to assist in business plan development and maintenance.  This team should consist of the following:

  • An attorney experienced in business planning 
  • A CPA 
  • A financial advisor 
  • A family business consultant (if the business is large and the emotional issues are complex) 

♦ What Employee Benefits Should Be Offered? A new business should make it a priority to choose the basic benefits that will be offered to employees.  These benefits may include, but are not limited to, the following: 

  • Life insurance (in particular, life insurance to fund a buy-sell agreement) 
  • Disability insurance 
  • Medical insurance 
  • A retirement plan 


♦ What is the Role of Business Succession Planning? Business succession planning enables a business owner to decide how an enterprise will be transferred upon his or her death, disability, or retirement.  Succession planning should be considered at the time a business is formed, and provisions for executing that plan should be included in the original business entity documents.  As illustrated in Case Study 1, it is also critical for the succession plan to be reviewed and updated annually.  This can help avoid negative consequences, such as failing to plan for disability or retirement, or leaving shareholders vulnerable to a poor valuation, with litigation as the only recourse. 

A properly executed succession plan defines certain events, such as death, disability or retirement that will trigger the sale of a business interest.  The succession plan and related documents provide a mechanism for the purchase of the business interest of an owner when such events occur.  The succession plan can stipulate that the business interest may be purchased by the business entity or by other owners.  If there are no other owners, the plan can outline what efforts will be taken to find a buyer for the business.

♦ What Needs to be Considered When Developing a Succession Plan? The first step in developing a succession plan is to envision the entity’s future.  Will the business grow or stay the same size?  Will other owners or employees take over, or will the business be sold to a third party?  Will the business continue into the future, or will it end upon the death, disability, or retirement of the owner?

Equally important is an understanding of how business income fits into the business owner’s personal financial plan.  Is it a significant source of retirement income for the business owner and his or her spouse?  Is it the sole asset in the business owner’s estate?

♦ What is the Nexus Between Business Succession Planning and Estate Planning? Since a succession plan is a key aspect of a business owner’s estate plan, it is very important to ensure that one is properly coordinated with the other.  Failure to do so can result in an unsatisfactory disposition of assets, or expensive litigation and fractured family relationships. 

Business owners should review both their succession plans and estate plans on a regular basis to ensure they remain up to date.  This is particularly important as business owners near retirement or become aware of an impending disability.

♦ How Can Succession Planning be Accomplished When a Business is the Main Source of Income for the Business Owner and/or His or Her Spouse? There are a number of alternatives: 

  • A Salary Continuation Plan. In this arrangement, the business agrees to pay some of the owner’s salary in the future.  When this is done over a number of years, it can provide the owner with a reasonable salary during retirement.  The agreement is an enforceable contract, but may be evidenced with an unsecured promissory note.
  • A Retirement Plan. A qualified pension, profit-sharing plan, SIMPLE, SEP IRA, or KEOGH can provide a business owner with reasonable retirement compensation at a favorable tax basis, while allowing the company to take a tax deduction for the contributions it made when the plan was established.  Since the plan is not a taxpayer, income on contributions is earned tax free and is taxed only upon distribution. 
  • A Structured Payout. A business owner who plans to sell his or her business may consider a structured payout over a period of years.
  • Separate Business Entities. In this arrangement, one business entity holds the business, and the other holds the real estate and leases it back to the business.  This allows a business owner to retire from the business, but keep the entity with the real estate to help fund his or her retirement. 

♦ How Can Succession Planning be Accomplished When the Business Has Multiple Owners? There are several options for transferring a business with multiple owners. They include: 

  • Buy-Sell Provisions. The best way to plan for a business owner’s death, disability, or retirement when there are multiple owners is utilization of buy-sell provisions in an agreement.  There are three common types of buy-sell agreements: a redemption agreement, a cross-purchase agreement, and a hybrid of the two.
    • A Redemption Agreement.  This is a contract between all of the owners and the business, in which the owners agree to sell their interests back to the company at an agreed-upon price (usually based on a formula rather than an exact figure).  If an owner wishes to sell to a third party, the redemption agreement generally requires that he or she first offer the interest to the company.  If the company refuses to buy, the interest can then be sold to a third party. 
    • A Cross-Purchase Agreement.  This generally is a contract between owners in which the exiting owner (or his or her estate) offers to sell his or her interest to the remaining owners at a specified price (again, typically based on a predetermined formula). 
    • A Hybrid Agreement.  This agreement is usually between the entity and the owners, and it provides for either of them to purchase the exiting owner’s interest.  In many cases, the agreement requires that the owner (or his or her estate) first offer the interest to the company.  If the company refuses the purchase, then the other owners may purchase the interest.
  • Life Insurance. If the company or the owners have illiquid assets, life insurance may be used to fund the agreement. 
  • Installment Sale. Life insurance may not be a satisfactory way of purchasing the business interest from a disabled or retiring business owner.  In such cases, an installment sale may be required.  In an installment sale, the remaining business owners pay a lump sum to the exiting owner shortly after the disability or retirement, with periodic payments thereafter. 

♦ How is a Succession Owner/Manager Selected? If the business owner has a specific individual in mind to take over the business, it is important to begin planning and grooming that person for succession immediately.  The business owner should consider transferring control of the business to the desired successor during his or her lifetime and assuming an advisory position for himself or herself.  This can help the chosen successor become accustomed to running the business while benefiting from access to the founder’s knowledge and experience. 

♦ What Housekeeping is Required? To help ensure that a succession plan will be upheld and properly carried out, it is critical for business owners to follow all business formalities.  This includes filing annual reports with the Division of Revenue and Enterprise Services, paying annual fees, filing a tax return, and holding annual meetings to ensure that the original plan is reviewed and updated as required.  Specifically, a business entity should: 

  • Hold annual meetings of shareholders, members, or partners. 
  • Take minutes of these annual meetings. 
  • Hold Board of Directors’ or Managers’ meetings. 
  • Take minutes of these Board of Directors’ or Managers’ meetings. 
  • Adjust any valuation agreement, if the buy-sell agreement so provides. 

Failure to perform entity formalities may be considered evidence that there is not a formal business, which calls into question such issues as the valuation of the business or any favorable tax positions.  It may also leave business assets open to individual creditors.  As shown in Case Study 1, failure to update a succession plan periodically can leave the business owner and his or her family in a precarious position.