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As a business owner, you have likely tried to protect your business from many common threats, such as theft, fire, vandalism, or natural disasters. Something you may not have spent as much time worrying about though is the threat that your own incapacity or death poses to your business. If that is the case, now is the time to focus on that possibility because the reality is that if something happens to you, everything you have built up could come crumbling down in a period short period of time. Incorporating a business succession planning component into your comprehensive estate plan is the best way to ensure that your death, incapacity, or even retirement doesn’t cause your business to fail.
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Just as there is no way to know when the end of your life is near, there is also no way to know when incapacity could strike. Both could spell disaster for your business in the absence of a plan. To illustrate why you need a plan, ask yourself the following questions:
- Have you designated someone to take immediate control of the business in an emergency, such as your death or incapacity?
- If so, does that person have the legal authority required to step into your shoes and run the business? We clients/customers and employees respect your replacement’s authority?
- Have you decided what will happen to your business when you retire or after you are gone?
- If so, have you discussed your plans with loved ones?
- If the current legal structure of your business the most advantageous?
- Will your family continue to benefit financially from the success of the business in the event of your incapacity?
- Following your death, will the business be part of your probate estate?
- Is there a mechanism in place for determining the value of the business after you are gone?
- If you plan to pass the business down to the next generation, how and when do you plan to accomplish the transfer?
- Does the business own sufficient liquid assets to pay any taxes?
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Why is incapacity planning so important? A small business cannot function for long without someone at the helm – and death is not the only thing that could cause that to happen. Your chances of becoming incapacitated for a short period of time are likely much higher than you realize. Designating someone to take over if incapacity does strike is crucial to the survival of your business. Moreover, your designated replacement must have the necessary legal authority to run the business.
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One of the most important considerations in a small business is management continuity. Who will take over the day-to-day management of your business in your absence? Never assume that an adult child or senior employee is willing and able to do so. Even if they are, does he/she have the legal authority and practical capacity to step into your shoes? If not, the business could falter rapidly. Both customers and suppliers can become reluctant to do business with an operation when they are unsure who is running the show. You need a designated successor who is ready and able to step up and take over as smoothly as possible should the need arise.
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Among the numerous options available that can facilitate the transfer of ownership of your business from one generation to the next, one of the more popular of those methods is through the creation of a Family Limited Partnership (FLP). An FLP allows you to transfer your legal interest in the business to the next generation slowly, over time, while maintaining control over the day-to-day management of the operation until such time as you are ready to retire. In addition, you may be able to gain tax advantages by using an FLP to transfer interest in your business to future generations.
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Every situation is unique; however, you should start the process far enough ahead of time for your successor to learn all that needs to be learned. When the plan is to pass a business on to future generations, you must not only plan for the legal transfer of ownership but also for the practical running of the business. The legal transfer of ownership can be accomplished quickly; however, there are tax advantages to transferring your legal ownership to the next generation slowly instead of all at once after you are gone. In addition, teaching the next generation how to run the business the right way takes time.
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One option is to enter into a Buy-Sell agreement. A Buy-Sell agreement guarantees that you (or your loved ones) will receive the fair market value of your interest in the business in the event you, or your surviving loved ones, must sell it later. In essence, a Buy-Sell agreement is a binding agreement between you and someone who agrees to purchase your interest in the business in the future for a pre-determined price or using a fixed method of determining the fair market value at the time of the sale.
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Liquidity is something all business owners should be aware of; however, if your business is a farm or ranch liquidity is probably even more important for your business. Small to medium size farms and ranches are notoriously short on liquid assets because the value of the farm or ranch is usually tied up in land, equipment, livestock, and other non-liquid assets. Federal gift and estate taxes, however, are calculated based on the total value of your estate assets, without regard to whether those assets are liquid or non-liquid assets. If your estate lacks sufficient liquid assets to pay any gift and estate taxes due, your estate Executor will have to sell estate assets to pay off the debt. All too often, the assets that must be sold are critical to the continued operation of the business. In essence, insufficient liquidity could result in the demise of your business following your death.
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Contact Us
For more information, contact an Albuquerque business succession lawyer at Morris Hall PLLC by calling 888-222-1328 to schedule your appointment today.