Smart Answers with Karen Klein
Q: I've worked for my family's business for nearly 10 years. Six years ago, I helped save the firm from going under, but today I'm still an hourly employee who gets no sick time, benefits, or paid vacation. Since my father hasn't approached me about a partnership, I realize I must propose one. How do I start? — A.V., Santa Clarita, Calif.
A: Your father may be procrastinating because he assumes you'll inherit the company one day. Or he may identify so personally with the firm that he cannot conceive of stepping back. "Sometimes founders are so possessive of their companies that they feel resentful toward inheritors," says Quentin Fleming, a professor at the University of Southern California's Marshall School of Business.
Ask your dad informally about his plans, says Otis Baskin, a Pepperdine University professor. "Does he want the business to continue in the family? Does he view it as a family legacy—or just another asset in his estate?" Then ask a trusted adviser of the company, such as an accountant, for help in developing a partnership proposal. "Sometimes dads will listen better to an outsider than they will to a child," Fleming notes.
Still, be prepared for rejection with a well-thought-out backup plan. "If you helped save the company, you're a valuable person, and it's unconscionable for you to be held back in your career. The sooner you go out and do something else, the sooner you'll blossom," Fleming says. "If you stay where you are, you risk becoming stale."
In the long run, leaving the company, at least temporarily, may be a plus. Don Schwerzler, of Atlanta consulting firm Family Business Institute, encourages family members to work at least two years outside the family firm so they can learn new skills and make their own mistakes.
Q: I operate a small marketing company out of my home and have recently become an LLC. I was thinking of transferring personal ownership of my condo to my company. Is this a good idea? — Robin Johnson, Los Angeles
A: The drawbacks outweigh the benefits, say experts. The upside is that your LLC would get a boost to its net worth if it owned the condo, improving its financial statement and perhaps its chances of attracting capital or credit.
But one of the main reasons to form an LLC is to protect your personal assets in case the company fails or is sued. If the LLC were to own the condo, you would lose that protection on one of your most important assets—your home—and put it at risk in a business failure or lawsuit, says Rubin Ferziger, a small business attorney based in New York City. You'd also lose the homeowner benefits allowed under federal tax law. Sell the condo, and you could end up paying capital gains on any appreciation.
You might think you'd be able to lower your taxable income if the LLC is able to claim mortgage payments, property taxes, and any condo fees as expenses. But then you'd have to pay rent to the LLC in order to live in the condo, and the LLC would have to declare that rental income, says Todd Elliott, a partner specializing in real estate law at Truman & Elliott in Los Angeles.
That's just for starters. Property insurance can be more expensive for business owners. Your mortgage may prohibit transferring the condo to a business entity. And any partner in the business would own an interest in your condo. Here's a better idea: Talk to your accountant about taking a home office deduction next year.
For a collection of Klein's previous columns, go to businessweek.com/go/sb/smartanswers
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