Estate Planning For Small Business Owners: Strategies For Succession

estate planning for small business owners strategies for succession

Whether you’re a sole proprietor, LLC, or S Corp, small business owners should have a strategy for succession in place. Your small business and its assets are handled the same way private estates are if you become incapacitated or die. 

This means that without a small business estate plan in place, California probate courts will follow traditional rules of succession, and that may not be what you intended – or what’s best for business.

Estate Planning For Small Business: How Things Move Forward Without You

What would happen to your business, and how would you take the helm if you were in a traumatic accident and unable to make decisions for days or even months at a time? What if you were to die unexpectedly in an accident or an unexpected medical event? 

These and other questions are all part of estate planning for small business owners, which should include a plan or strategies for succession (or not, depending on the type of business you own).

Without an estate plan in place, the state will handle your business the same way they’d handle your personal assets: following intestate succession laws. In most cases, this is not what small business owners would want. This would mean things go automatically to your spouse or would be divided equally between biological children – even if they had little or nothing to do with your business.

Here are questions to consider when creating a small business estate plan that includes strategies for succession.

Ensure the company is structured correctly

Legal business structures affect how a company is handled when an owner is incapacitated or dies without a succession plan. For example, if you are a sole proprietor without an estate plan for your business, the company would automatically go to your spouse or be split between your children. If you are an LLC and you have a partner, the partner would take the helm, and so on.

If you are a new business owner and you’ve never met with an attorney specializing in small business law, now is a good time to do so. Investing a small amount for a single consultation will teach you more about how to structure things and begin thinking about strategies for succession or how to distribute or dissolve the company if necessary.

Plan for future profit & asset distributions

If you have a business partner, there’s a good chance business will continue more or less as usual if you are incapacitated or die unexpectedly. In this case, there’s a good chance your spouse or beneficiaries/heirs should still receive a portion of the company’s profits or assets if the company is dissolved down the road. This is especially true if you create intellectual property, software, or other digital assets the company uses long after you’re not there.

In this case, you want to establish that via a trust or other documents that take both earnings and future tax considerations into the picture.

Identify successors

Who will keep the company running if you die? If your company is your legacy and you want it to continue running without you, establishing the successor(s) is an essential step in small business estate planning. Some options include:

  • Establishing a buy/sell agreement so co-owners automatically absorb your portion of the business – in whatever division is established in the documents.
  • Purchasing a specific life insurance policy specifically for this purpose, naming your co-owners as beneficiaries so the funds can be used to support the sale, which proceeds the sale being distributed to your heirs/beneficiaries as you see fit.
  • Your spouse or children may not be the best option, OR they may need support if they can handle some but not all aspects of running the business without you.

During a meeting discussing small business succession strategies, we’ll talk about who can continue running the business successfully if you’re not there, which often involves including managers and key or long-time employees who can share certain responsibilities as the business moves forward and determine how it may need to restructure for the long-term.

Create a strong management & advisory team

You’re not alone if you are the “do it all” type of business owner. Many small business owners have difficulty delegating or building management teams because they know (or feel) that nobody can do things as well as they can.

That may be true, but that mindset debilitates any chance of your company thriving if something happens to you. Instead, the long-planning business owner learns to find the right people to work as managers and key employees. They train them to the best of their ability and trust them to do excellent work – even if it’s not identical to the company owner’s vision – to keep the business successful.

Other things to think about:

  • Ensuring prospective successors/managers are consistently trained so they feel competent to take their respective reins.
  • Creating clear lines of delegation regarding each successor’s roles and responsibilities.
  • Naming outside advisors or directors who can support the transitions and serve as resources as the new successors acclimate.
  • Establishing compensation, information, and a sense of security so that the ensuing changes do not affect employee retention or the support of key investors, players, shareholders, etc.

Creating strong, experienced management and advisory teams for your business – and incorporating them into your estate plans for company succession – is invaluable to the company’s future.

Let Tseng Law Firm Guide Your Small Business Estate & Succession Plans

It’s so important to choose the right law firm to guide your small business estate planning and succession plans. As small business owners ourselves, and passionate about what we do to serve our community, Tseng Law Firm understands how important it is to make sure your business is set up for perpetual success – regardless of what the future may bring.

We are here to support you and your small business partners as you take the next step in securing your business’s future. Schedule a consultation to discuss business estate planning and strategies for succession.