Death, taxes, and retirement

If done correctly, an owner’s retirement and its benefits can be just as certain as death and taxes.

It is common knowledge amongst AEC firm owners that, with proper guidance from an attorney and a tax advisor, the impact of death and taxes on a business’s operations can be minimized with careful planning. However, most AEC firm owners fail to realize that retirement itself can be just as detrimentally impactful on their firm’s ability to continue normal operations as death or taxes if it is not properly planned for well in advance.

This holds especially true for business owners who are responsible for the day-to-day operations of their firm. As most firm owners already know, overseeing the firm’s operations, employees, and projects leaves very little time to think about what life will look like after reaching that “golden age” of retirement. Most importantly, there is also little time to determine the answers to some vital questions: How will new owners be selected? How will business decisions be made? Will you continue to work for the firm at reduced capacity? How will you, the retiring owner, be paid for your respective percentage of ownership once you do retire?

The simple answer is to be proactive in your ownership succession planning and to document your firm’s decisions within its respective governing documents. This process should begin with a comprehensive review of your firm’s governing documents and internal relationships to determine the necessary actions required to implement a strong succession plan that minimizes the risks associated with an owner’s retirement. With proper planning, you can get out, get paid, and ensure that the firm is capable of continuing normal operations while being managed by the right people.

In regard to entities organized as a limited liability company (“LLC”) or as a professional limited liability company, the firm’s operating agreement, in particular, should be carefully drafted to reflect the owners’ desires in a manner that provides comprehensive guidance to both current and future owners. In its simplest form, the operating agreement is commonly referred to as the “heart and soul of an LLC,” because it governs the members’ relationships to each other and to the LLC, the activities of the LLC, and the overall rights and duties of members and managers.

Depending on which state your firm is headquartered in, a written operating agreement may not have been required in order for your firm to be organized as an LLC. However, it is always wise to have a written operating agreement to maintain limited liability protection for members and managers. Of similar importance, a carefully drafted operating agreement can also provide clarity and resolution in the midst of a disagreement between members as to a particular decision requiring a vote of approval by LLC members or managers.

Some of the most common topics covered in an AEC firm’s operating agreement include:

• The management of the LLC (member- or manager-managed?)
• Confidentiality and non-compete obligations
• The rights and responsibilities of the members and managers to the LLC and to each other
• Specific decisions that require a vote by the members, managers, or both
• The process for adding and removing a member
• The process for electing and removing a manager
• The timing of distributions and any restrictions imposed on those distributions
• The allocation of profits and losses
• Restrictions on the assignment, transfer, or encumbrance of membership interest
• Specific criteria that an individual must satisfy to become a member or manager
• Specific events that will cause a member or manager to no longer be a member – usually accompanied by language permitting the firm to purchase the member’s interest at a discounted price

The decisions documented in your firm’s operating agreement to lessen the impact of an owner’s retirement on a firm’s business operations should be the result of working with an attorney, a certified public accountant, and most importantly, a trusted advisor with extensive knowledge of and experience in the AEC industry. If done correctly, retirement and its benefits can be just as certain as death and taxes.

Justin Ramirez is an ownership transition advisor at Zweig Group. Contact him at jramirez@zweiggroup.com.

Zweig Group’s new Ownership Transition in the AEC Industry Webinar covers a range of topics, giving attendees a new view of ownership transition and how an effective plan can be put into place. Whether attendees are young, up and coming professionals or principals looking at their impending transition, this webinar gives everyone an introspective view of their career.