Business owners must make the same “what if…” plans as individuals. For example, what happens to your business if you die? What if you become incapacitated and cannot make essential day-to-day, legal, or financial decisions? How do you want your business to continue (or not) in the case of sudden or traumatic death?
The answers to these questions may seem obvious to you. However, if you were to die or become incapacitated without a legal business succession plan in place, a judge may be the one to determine all of the answers and more.
Tips For A Business Owners Succession Planning
An owner’s unexpected death may jeopardize the long-term viability of a company, whether it is a sole proprietorship, partnership, or corporation. For example, if you die without a will or estate plan, your property and assets move through probate. The same is true for business owners who die without a business succession plan, and the results can be disastrous for your business and its employees.
Your business will wind up in probate, and a judge ultimately decides who gets what – which could mean the dissolution of the company and division of its property and assets between the legally stated succession of heirs and beneficiaries.
That could result in decisions you would never have made for your business or its future. Instead, we advise meeting with an estate planning attorney to create business succession plans for one of two situations: the event that you are incapacitated OR a sudden and unexpected death. Planning for business succession plans also includes scenarios other than death or incapacity, such as the resignation or retirement of a partner, divorce, remarriage, and other unexpected life events.
Find the right estate planning attorney
You should always meet with at least three estate planning attorneys before choosing the right fit for you. Most importantly, prospective estate planning attorneys should be currently licensed by the California Bar Association. Secondly, they should have ample experience with business succession planning, verified by current referrals.
Finally, you want to feel comfortable working with your selected attorney because estate plans are living documents. They should be reviewed regularly, and this means you’re forging a long-term legal partnership with the chosen estate planning lawyer.
Establish who the business will pass to
If you are planning to pass the business on to a specific person or persons, this should be clearly stated. In many cases, the people most capable of running the business successfully without you are not your spouse or immediate family members. Yet, as one of your assets, that’s exactly what may happen if you die or become incapacitated without clear direction.
Consider your spouse or ex-spouse’s stake in the business
It’s not unusual for a spouse who’s not a technical partner in the business to have given up quite a bit to help you build it. If you divorce, that sweat equity and loss of income from working elsewhere are considered by a judge if it hasn’t been legally addressed in business planning documents.
Similarly, any business owner or partner who remarries or has a blended family should be completely transparent. In some cases, this might mean protecting their biological children’s inheritance; in other cases, it means clearly stating the succession of certain assets, interests, or shares to a new spouse and step-children.
Establish family legacy protection if desired
If you want the business to remain in the family, discuss legacy protection in the form of a family limited partnership (FLP) or a family limited liability corporation (LLC). In addition to establishing which roles or responsibilities will transfer to whom when you die, these legacy protections also prevent family members from being able to sell or transfer their stake in the business to anyone outside the family to retain the family-owned status.
Business Owners Planning For Estate and gift taxes
If your business succession plans include family legacy protection, your attorney may discuss the potential for estate and gift taxes. This is similar to how a living trust creates estate and tax gifts/tax benefits for the present and future.
As Nolo.com states, FLPs and family LLCs provide a way for you to gradually transfer non-managing interests to your children during your lifetime while you retain control of the business and maximize the amount you transfer tax-free.
Plan for key player retirement or departures
Simple business succession planning focuses on what happens to the business when an owner or key partner dies. However, other life transitions significantly impact a company’s future. Your retirement is one of these, as is the departure or retirement of other partners or essential players. Therefore, it’s wise to create a business succession plan that considers these scenarios.
In this case, we recommend creating buy/sell agreements that honor these and other scenarios that may require portions of the business to be sold or passed to other individuals. One of the most common ways for small to medium business owners to feel comfortable with this arrangement is to take life insurance policies out on each other for the estimated value of their stake in the company. Look for life insurance policies that include payouts for disability as well. Read, Life Insurance For Business Owner… to learn more about the importance of life insurance policies for business owners.
Meet With an Estate Attorney to Learn More About Smart Business Succession Planning
Are you interested in learning more about business succession plans? Contact Tseng Law Firm, at 510-835-3090, to schedule a free, no-obligation consultation.