Why does dementia matter to business?

Dementia creates a huge cost for US business.

This comes in the form of a gradual decline in productivity, early retirements, workers leaving to care for their loved ones, and eventually insurance costs for care.  It is a national problem that needs resolution.

Dementia is various things, but one easy descriptionis that it is a progressive diminishing of the brain’s cognitive functions.  That means that practically, if you have dementia, you will gradually lose the ability to make complex judgments or certain kinds of decisions.  You might lose the ability to manage your money, or drive the car.

These changes are gradual, and usually fairly slowly developing.  So, you might have episodes for years that are frustrating but not a problem.  Then, sometimes as a surprise, you can’t function like you used to.

Why does that matter?

If you are a younger worker, you might lose productivity or efficiency.  If you are an older worker, you might need accomodations.  Or, you might need to retire sooner than you had hoped.  This can affect you, your co-workers, your company, and even the community.  We are not talking about the cost of care … that is further down the timeline.  But, studies show that in 2010 distracted workers cost the national industry in the US alone over $650Billion a year.  That was back in 2010, according to a business journal.  Imagine what it is today, and what just a few minutes of confusion or having to repeat things can do.

Early retirements are the next factor.  Workers are retiring earlier than usual when dementia is involved.  And it isn’t just here in the US… it is a global issue.  In the UK, “Early retirement of those diagnosed with dementia is estimated to cost businesses a further £627m a year” (see this article)

Finally, workers often leave to care for their loved ones.  This can reduce the workforce and coast companies in terms of retraining, disruptions, and overall corporate health costs.

How many people are affected?

A poll, “commissioned by Workplace Options in conjunction with the Alzheimer’s Association, showed that nearly 70% of those who work or worked while providing care had to modify their schedules. They went in late, left early or took time off during the day.

Other findings:

  • 32% had to take a leave of absence.
  • 26% changed jobs for a less demanding role.
  • 23% had to go from working full time to part time.
  • 20% said their work performance suffered to the point of possible dismissal.
  • 24% had to give up working entirely.

Other issues that come up while being a working caretaker are physical exhaustion and psychological problems such as depression and anxiety. For some, it amounts to a second job.”  (See the article)

What can we do?

As business owners, we need to adapt the way we work to accommodate people who need to care for others.  We need to understand what our people need for their own health.  And, we need plans that appropriately and legally adjust our practices and procedures.

It is a big task, and growing every day.

You can help by getting behind initiatives to study dementia, by taking care of yourself, and working to support your co-workers and family.  Together, we can adapt while we wait for the cure.


Business and Life Insurance – is it in your cards for the New Year?

Each year, many of us have to consider changes or updates to life insurance.  Maybe this is that time of year for you.

If so, please consider insurance for lots of different things.  For example, for your

  • Auto and Home (this is obvious, I suppose, but according to one source, up to 20% of NC drivers might have lapsed insurance!)).
  • Life (many options are available, depending on your needs and your age).
  • Health (basic coverage, Medicare Parts A-D, supplementals, and more).
  • Umbrella (protects your assets from high-value claims).
  • Business (general liability, errors and omissions or malpractice, life insurance for key-man, etc. – a complicated but essential set of policies).
  • Long-term care insurance (protects you from the extremely high costs of care in skilled nursing or assisted living communities.  About 75% of all people over 90 end up needing some level of long-term care, according to various organizations).
  • Children (insuring your children isn’t a bad plan to protect your investment in them. And later, insurance allows you to pass the coverage on to their families.  If your child has special needs, insurance can fund Special Needs Trusts for their protection down the road).
  • Estate Planning (many uses, including using insurance for protecting assets, leveraging assets for generations to come, or providing for charitable donations with a minimal up-front cost).

Each of these present different needs, opportunities, and options.  You should review them with your favorite insurance agents, but be advised that not all agents will be able to discuss every aspect of your needs.  If in doubt, ask questions, and consider shopping around.  Price isn’t the only consideration … scope of services, personal attention, proximity to your home or office … all can be relevant is selecting an agent.

Don’t guess about your insurance needs.  Find an agent and ask appropriate questions.  Ask us if you need referrals.

In my practice, Long-term care insurance is addressed as part of nearly every initial consult.  Yes, it is that important.  New options make it affordable and well-leveraged for most people.  But, like all insurance, it works best and is least expensive the earlier you purchase it (and you should have it before you need it!!).

Here are some related thoughts from my blog postings and website – Operating Agreements, Planning for Special needs, elder law resources

If you want to provide insurance for your employees, check out sites like this one.

Here is a review resource you might find useful for a review of different companies for certain types of personal insurance …

I don’t personally direct you to one company or agent, but if you ask for referrals, I’ll find some names for people my clients or I have worked with who might fit your needs.



Why does a small business need an operating agreement – part 2

Breaking up is hard to do … or at least, it should be!

In part 1​ we outlined what an operating agreement is. Go back for a refresher if you’d like … we’ll wait.
Now, one of the features of a good operating agreement is how it controls ownership of the members. You will recall that:
  • Operating Agreements and Bylaws are the rules by which a businessentity operates and almost all default statutory provisions can be updated by the agreements 
  • Provisions in the documents usually describe how members join and how interest is transferred. If no specific provision, state law applies, but the agreements can override state law. 

Forced Transfers

Interestingly, and importantly for a small business owner, provisions in the document can limit or force transfer in several ways. For example, an operating agreement might actually force a sale of the membership share under specific circumstances.

How about an example? Suppose one of your fellow members was in the middle of a messy divorce. If the soon-to-be-Exes agreed, it is possible that the divorcing member might give her shares to her husband in the settlement agreement. Then, through no plan of yours, you might have a new member who does not share your views about the business, and might even be a bit annoyed at your other owners and staff. How would that work in your business?
Can you do something to prevent this? Glad you asked … yes, we can! Here is an example provision that could force a sale in the event of a divorce:
Each Member agrees that if the Member suffers any involuntary transfer or purported involuntary transfer of part or all of the Member’s Shares, including but not limited to any transfer or purported transfer resulting from bankruptcy, insolvency, divorce, or otherwise, the Member shall be deemed to have made on the date of the event an offer to sell all of the Member’s Shares
In most cases, the Operating agreement should also provide that other members or that the company can (or, must) buy the shares. The key is not to let control of one member’s shares get outside the business too far … unless you want it to, of course!

Economic interest

Now, we should note that “membership interest” is usually thought of as “ownership” and often means that member’s shares also participate in the profit (or loss). It is possible in the operating agreement to separate ownership from economics. In that case, a divorce settlement might give an Ex-spouse the right to receive the distributions from the business each quarter. That doesn’t mean the Ex has a membership (e.g., “Voting” and management right) interest… only that he receives a profit check. You should be sure the operating agreement describes this case too.
Here is an example clause that uses a concept of “capital” shares to prevent a transfer of ownership interest:
Subject to the provisions of this Article, a Member may assign the Member’s Capital Shares in the Company in whole or in part. The assignment of Capital Shares does not itself entitle the assignee to participate in the management and affairs of the Company or to become a Member. The assignee is only entitled to receive, to the extent assigned, the distributions to which the assigning Member would otherwise be entitled.

Buy-Sell provisions

Another way operating agreements can limit transfers is through the use of buy-sell agreements. Buy-Sell agreements, or “Business continuation agreements,” require that the business interest is sold according to a predetermined formula to the company or the remaining members of the business.
A buy–sell agreement consists of several legally binding clauses in the operating agreement or a separate, freestanding agreement, and controls the following common business decisions (or others, depending on your needs):
  • Who can buy a departing partner’s or shareholder’s share of the business (this may include outsiders or be limited to other partners/shareholders); 
  • What events will trigger a buyout (the most common events that trigger a buyout are: death, disability, retirement, or an owner leaving the company) and; 
  • What price will be paid for a partner’s or shareholder’s interest in the partnership. 
  • The agreement or stock itself my impose Stock sale restrictions, Stock income restrictions 
  • Often, will include Non-compete clauses
The buy-sell agreement is very useful in valuations (we’ll cover that in Part 3 of this series) because there is an intrinsic formula to determine the value.

Funding a Purchase

Whether you have a buy-sell agreement, or a simple clause in your operating agreement, there is now a chance that your company might have to actually buy shares of a departing member. How can you afford that? Careful funding of Buy-Sell agreements is needed … and it looks very much like an insurance policy. First you define the triggering events. Death, Disability, and Retirement are common. Divorce and Bankruptcy less common – and insurance for those may be expensive.
Then, you define how to fund. There are several different methods. For example, Cross-Purchase Agreements create in each owner a personal liability, so all owners insure each other. While good for a small number of partners or members, this can be too complex for more than “several” owners and may impose tax implications on owners. In addition, insurance Expenses might be unfairly high for younger owners.
Another approach is an Equity Redemption Agreement. Here, the Business is obligated to purchase a departing member’s shares and so, the Business buys insurance on each partner/owner/shareholder. It is a more even distribution of expenses, but proceeds may be subject to business creditors, the disbursement may impose AMT on Corporation, and a majority owner with LPOA (limited power of appointment) might have estate implications.
A third, less common method is through use of an ESOP (Employee Stock Ownership Plan). Very generally, in this approach, a member sells shares to the company, which offers those shares to the employees under the ESOP.  This can generate cash, which is then repaid by the member. It can be an effective way to fund a buyout, but it is complicated.
Funding a buy-sell is not a one-stop answer … there are many possible solutions and you need to work with an attorney and a financial planner who can understand the unique issues you and your members face and who can find the most cost effective solution.

Terms of Sale

However you have designed the agreement, and however you value your business, your operating agreement also needs to describe the terms of sale.  Here is a sample clause that we have used:
The Purchase Price shall be paid in full by a certified or bank cashier’s check at the Closing; or, at the sole election of the Company, the Purchase Price shall be paid by the delivery of a certified or bank cashier’s check in an amount equal to 20 percent of the Purchase Price, and the balance shall be paid pursuant to a nonnegotiable promissory note of the Company (the Note) providing for equal annual payments of principal, together with accrued interest, over the following five years beginning on the first anniversary of the Closing.
Whew! Operating agreements can be a very important part of your business … when forming, and when splitting up. Be sure your does what you want.
Next, we will look at business valuations.  In the meantime, if you can’t wait for the next parts, give us a call. We will be glad to talk to you about your business, and your concerns about your operating agreement (or anything else that you need to talk over with us).
  • Part 3 – What is my business worth?
  • Part 4 – What do I actually own of my business?  Is it even mine?
  • Part 5 – Who’s next?
  • Part 6 – Protecting your business with an Operating Agreement.​

Why does a small business need an operating agreement? Part 1

“Why do I need an operating agreement?  It is an unnecessary cost!”

Many clients ask this question of us when they are forming their businesses.  The answer might surprise you because the operating agreement seems like just an extra add-on, and it is usually overlooked or intentionally skipped … well, ahem, surprise,  it shouldn’t be skipped!  This is part one of several parts discussing the operating agreement.

Part 1 – What is an Operating Agreement?

The Operating agreement is one of several essential parts of your business.  The basis of the operating agreement is exactly what it sounds like … the agreement between the members of an LLC as to how their new business should operate.  North Carolina statutes describes the operating agreement this way: “Any agreement concerning the LLC or any ownership interest in the LLC to which each interest owner is a party or is otherwise bound as an interest owner.” NCGS §57D-2-30.

This means one important thing right off the bat … any agreement is an operating agreement.  Yes, the verbal agreement, the notes on the back of the napkin, the email dashed off in a hurry … all can constitute some or all of an operating agreement.

So what, you ask?  Well, it matters because that is one way the courts will decide how to rule if you ever have a disagreement and need to split your LLC into smaller parts or close it entirely.  This can be a difficult issue if one of the partners decides to leave and brings out the late night email in which you said he could have 25% of the company.  Well, we know you meant when he complies with certain guidelines or generated the required sales volume.  But, it might be interpreted as his owning that part … right now, without other caveats.

So, if the guideline is that any agreement is the operating agreement, then we really should get that in writing, the way you really meant it, don’t you think?

Now, to review, Operating Agreements (for LLCs) and Bylaws (for Corporations) are the rules by which a business entity operates.  Important provisions in the documents usually describe how members join and how interest is transferred.  That means that you and your other members can decide how ownership and voting percentages are decided, and how members are added, and a host of other details.

Complying with state law is easy … Almost all default state law (“statutory”) provisions can be updated by the agreements.  If you don’t decide about everything, it is ok because the state will have some default rules for you.  We know you will like those because they are written for your best interest.  Wait, maybe you should ask what they are before you agree to that!

Next, we will look at some provisions in the agreements, common ways companies separate, and how the operating agreement could help resolve the split.

In the meantime, if you can’t wait for the next parts, give us a call.  We will be glad to talk to you about your business, and your concerns about your operating agreement (or anything else that you need to talk over with us).

  • ​Part 2 – Breaking up is hard to do …
  • Part 3 – What is my business worth?
  • Part 4 – What do I actually own of my business?  Is it even mine?
  • Part 5 – Who’s next?
  • Part 6 – Protecting your business with an Operating Agreement.

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