Are you a small business owner? If so, the odds are good that you put a significant amount of time, money, and thought into getting your business off the ground. If it is finally showing a profit and appears headed in the right direction, it is now time to ensure that all that hard work and sacrifice is protected, both now and in the future. You likely have insurance that covers all kinds of losses that could negatively impact your business; however, have you planned for what would happen to your business if something happened to you? Including a business succession component in your comprehensive estate plan is the best way to protect your financial, and emotional, interest in your business.
Is Your Business Really Protected?
. You have probably purchased all kinds of insurance policies in an attempt to protect against every conceivable loss your business might suffer. What you may have forgotten though is to protect against the biggest loss of all – you. It is time to shift your focus to ensuring that your financial interest in the business is protected in the event of your incapacity, retirement, or death. To illustrate the necessity for a business succession plan, ask yourself the following questions:
- If you are incapacitated tomorrow in a tragic accident, who will take over the immediate day-to-day control of your business?
- Is it clear to your employees, business associates, and family who will take over?
- Does the individual designated to take over have the legal authority to do so?
- Will your family continue to benefit from the business’s success in your absence?
- If you become permanently disabled, or retire, who will take over your business?
- Will your business be included in the probate of your estate?
- If your business will be part of your estate, what will happen to the value of your interest in the business if it is sold?
- If your business is a family owned business have you prepared the next generation to take over?
- Have you set up the proper legal structure for the business to facilitate the transfer to the next generation?
- What will be the tax implications for your business should you die?
- Does the business have sufficient liquid assets to cover any tax debt that might be owed when you die?
Unless you can answer every one of those questions without hesitation, it is time to sit down with a business planning attorney.
What Is Involved in Business Succession Planning?
Business succession planning involves making provisions for the possibility of your incapacity, death, or even retirement, to ensure that the business continues to operate successfully or that your loved ones receive a fair price for your interest in the business if it is sold.
One thing you want to avoid is simply gifting your business to children, or other family members, in your Last Will and Testament because such action will trigger a lengthy and expensive probate.
The business succession plan you create will be as unique as your business; however, there are some common options/strategies, including:
- Gifting by a Last Will and Testament or a Living Trust – although this is an option, it isn’t usually recommended for several reasons. First, if you utilize a Will, there will be a probate. A Living Trust can avoid probate. But even with the much preferred Living Trust, business assets could be lost to gift and estate taxes if your estate lacks the necessary liquidity to cover the tax bill. In addition, gifting your business leaves many questions about the management and profits of the business unanswered and strips you of all ability to control, or even guide, the business in the future.
- Family Limited Partnership – if you plan to keep the business in the family, a family limited partnership, or FLP, may be best for you and your family. You can maintain majority control and day-to-day management of the company for as long as you wish; however, your successor can also begin to learn the business while you are still around to provide guidance and advice. In addition, there are typically some significant tax advantages to creating an FLP.
- Buy-Sell Agreement — this option is often used when there are partners involved who are not family members. A buy-sell agreement allows you to determine ahead of time what your interest in the business is worth or, in the alternative, provides an agreed upon method of valuing the business when the time comes. Your partner(s) agrees to purchase your interest in the business should certain events occur. This ensures the continuation of the business and a fair price for the sale of your interest in the business, the proceeds of which will then become part of your estate or will go directly to your loved ones.
Contact a Business Succession Lawyer
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about incorporating business succession planning into your estate plan, contact the experienced business succession planning attorneys at Morris Hall PLLC by calling 888-222-1328 to schedule your appointment today.