Family Business Center of Pioneer Valley

Family Business Center of Pioneer Valley

Three Lawyers With Answers

by Shel Horowitz

Attorneys from FBC sponsor Bulkley, Richardson and Gelinas, LLP tackled three questions asked ahead of time by attenders at the March gathering.

First at bat was Mary Jo Kennedy tackled non-compete covenants: "Covenants not to compete are different in every state. In some states, they're not even valid. So you really do not want to get a form off the Internet or from your trade association. Each of your needs is going to be totally different.”

"There has to be a legitimate reason for the non-compete such as necessary to protect the legitimate business interest of the employer: trade secrets, goodwill, etc. What are the restrictions? What is reasonable in geographic scope and length of time? It's interpreted very narrowly by the courts. They're going to make sure employees have the ability to earn a living if they go elsewhere. Many judges will look at what's fair, what's reasonable. If you go too big, overly burdensome, the court will not narrow it; they'll simply declare the agreement unenforceable.”

"When hiring—are applicants bound by any of these covenants? You want to know at the time of the interview, and not after you make the hiring decision.”

Next up was Scott Foster, on whether to have a buy-sell agreement: "Who's buying? Who's selling? Where's the money coming from? Are you dead—is there an insurance policy? Where's the money going to come from? The bank is not here to be your exit strategy. Will you leave an empty shell? Lastly, when will this agreement take effect?"

Does the departing generation just need to comfortably retire? Or do they want millions?

"Once you've answered those questions, you get the answer" about whether a buy-sell agreement makes sense.

Finally, Ron Weiss discussed who should own a building that your company buys: "Often, the answer should be a separate LLC from your operating business. This offers the opportunity to accomplish:

  • Reduced-tax or tax free transfer of wealth: if it's owned in substantial part by the younger generation it avoids gift taxes in transferring equity. Rent payments are deductible and used to pay down mortgage, and the equity builds tax-free
  • Tax-free distributions of substantial amounts of cash (unlike a C or S corporation)
  • Chance to let the older generation transfer ownership of the operating company but retain a stream of income from the real estate
  • Chance to provide an income stream and equity to children who don't work for the business * Flexibility to sell operating business and retain the real estate without tax consequences
  • Isolating a major asset from most of the risks inherent in youroperating business."

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