Running a successful contracting business in California requires more than just skill and dedication to your craft. To truly safeguard your business assets, you must consider the future — not just for day-to-day operations, but for the long-term continuity of your business. Business succession planning is a critical tool to ensure your contracting business continues to thrive, even after you retire, step down, or in the event of an unexpected departure.
Why Business Succession Planning Matters for Contractors
Contractors face a range of unique risks and challenges, including fluctuating market conditions, regulatory changes, and reliance on specialized skills. Without a well-structured succession plan, your business could experience significant disruptions or even collapse in the event of an unexpected change.
For contractors, business succession planning offers key benefits. It ensures continuity of operations, allowing projects to proceed without interruption during ownership transitions. Additionally, it protects valuable business assets—both tangible and intangible—such as client relationships, equipment, licenses, and intellectual property. A well-crafted succession plan also minimizes the risk of legal disputes, reducing the likelihood of internal disagreements or external claims over the transfer of ownership.
Step 1: Assessing Business Structure and Ownership
Before diving into succession planning, it’s important to evaluate your current business structure. Most contractors operate as sole proprietors, partnerships, limited liability companies (LLCs), or corporations. Each structure has its own legal and tax implications, which will affect your succession plan.
- Sole Proprietorships: In a sole proprietorship, the business is indistinguishable from the owner. This means that if you retire or pass away, the business will cease to exist unless it has been sold or transferred beforehand or as part of your estate.
- LLCs: California LLCs are generally governed by their operating agreement which should outline the process for corporate governance and the management of the LLC. (Cal. Corp. Code § 17701.01 et seq.)
- Corporations: The governance and management structure of corporations are typically laid out in the corporation’s Bylaws, Shareholder Agreements, and other governing documents between the owners of the corporation.
Step 2: Drafting a Buy-Sell Agreement
A buy-sell agreement is a critical component of a contractor’s succession plan. This agreement dictates how ownership interests are transferred in the event of specifically identified circumstances, such as retirement, death, or disability. For contractors, it’s particularly important to include provisions that ensure the seamless transfer or retention of the company’s licenses, key client relationships, and equipment.
Buy-sell agreements are essential for several reasons, including establishing valuation methods and restricting ownership transfers. For example, a buy-sell agreement can set forth how the business or ownership interest will be valued during a transfer. It also restricts transfers, ensuring that ownership remains within the existing group of partners or members, thereby preventing an unwanted third party from gaining control of the business.
Step 3: Protecting Contractor’s License and Key Assets
Contractors must hold a valid license issued by the California Contractors State License Board (CSLB), which can be at risk during ownership transitions—especially for sole proprietorships or when a Responsible Managing Officer (RMO) or Responsible Managing Employee (RME) leaves the company.
To maintain license continuity, contractors should first identify a successor licensed person to serve as RMO or RME. Under California Business and Professions Code § 7068, corporations and LLCs must designate a qualified individual to serve in this role, responsible for overseeing the company’s construction operations and ensuring compliance with licensing requirements.
Additionally, the CSLB mandates timely notification of any changes in ownership or responsible managing personnel. Failure to comply can result in license suspension or revocation.
Beyond the contractor’s license, it’s also crucial to safeguard other key assets, such as equipment, property, business goodwill, and trade secrets. These assets can be protected through various agreements tailored to secure the company’s long-term value.
Step 4: Planning for Taxes and Estate Implications
Succession planning must also consider the tax and estate implications of transferring ownership. Without proper planning, your estate could face significant tax burdens, reducing the value of the business passed on to your heirs or partners.
Legal counsel collaborates with tax advisors, accountants, and business owners to create a comprehensive succession plan. This coordination ensures legal, tax, and financial strategies are aligned, minimizing liabilities, protecting assets, and facilitating smooth ownership transitions. By working together, they help secure the business’s long-term success and ensure a seamless transfer of ownership.
Step 5: Implementing and Updating Your Plan
Once your succession plan is drafted, it’s essential to ensure all documents are properly executed and filed as required. This includes regularly updating the plan and effectively communicating with shareholders and members. In many cases, obtaining shareholder or member consent may require a special meeting, such as a shareholder meeting, board of directors meeting, or member meeting. The process for this is typically outlined in the company’s operating agreement or bylaws.
Conclusion
Business succession planning is crucial for contractors seeking to protect their assets and ensure the ongoing success of their businesses. By creating a comprehensive plan that addresses ownership transitions and license continuity, contractors can minimize disruptions and preserve the value of their hard-earned business. Whether through a buy-sell agreement, designating a successor RMO, or structuring the plan for maximum efficiency, these steps will provide peace of mind and long-term security for your business.
Article by Marco N. Sarkovich, Esq. in 2024. Mr. Sarkovich is an Associate Attorney at Porter Law Group, Inc. in Gold River, California. He can be reached by phone at (916) 381-7868. Visit the firm’s website at www.porterlaw.com. The information contained in this article is not intended to be, nor is the information, legal advice. ©2024.
