This month I am featuring a Guest Blogger, Estate Planning Attorney Christopher J. Berry, who shares several tips on succession planning for business owners. Chris is a partner in the law firm of Witzke Berry. He will also be one of the speakers at my lunch and learn on March 24th. Information and Registration Details for that event are at the bottom of this article.
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Nothing in life is more certain than death and taxes. As a small business owner, the same holds true. That is why it is important to consider estate planning for your business, otherwise known as “business succession planning”.
Business succession planning is important no matter the size of your business or whether you have employees. For many entrepreneurs, their business is one of their most important assets; yet, too often, they fail to plan for it. If you’re a business owner, ask yourself “if I were to pass away, what would happen to my business?” Considering death and uncertainty is always a scary proposition. Developing a plan can take some of the uncertainty out of it, for your heirs and loved ones.
Without proper estate planning for the business, upon an owner’s death, the business may pass through probate into the hands of unplanned heirs who have no interest in continuing the business. The probate system is very inefficient, with an average cost of 3%-5% of any assets, including the business, that passes through the system.
Another question that needs to be answered, is “what happens to my business if I don’t die?” Proper business succession planning considers not just death, but also disability. What happens if the owner of the business or key manager becomes disabled? Who will run the business and under what type of legal authority?
These questions become even more important when you have a business with more than one owner. What happens if one of the owners were to pass away? Without proper planning, the family or spouse of the deceased owner could now share ownership interests with the surviving partners. Most small companies and partnerships would not want the spouse of one of the partners to have management power, and most spouses would not want to be involved in the operation of a company. This is usually a bad fit all around.
Likewise, if one of the partners were disabled for any length of time, would the healthy partners wish to pick up his or her slack?
These are a few of the questions that a business succession planning lawyer can help you answer. We help clients with the whole life cycle of a business from the formation to the proper exit strategy.
During the formation stage, individuals often consider only the tax consequences of choosing the correct entity. They ignore the legal questions that help determine the proper entity. It is important to speak with a CPA as well as a lawyer in making the decision of what type of legal entity is right for you.
Once the right entity is chosen and the proper documents are filed with the state as well as the IRS, the next and possibly most important step involves the operating agreement and possibly the buy-sell agreements. These two documents, coupled with the business owners personal estate planning documents, are drafted to answer almost all of the above questions.
Points for business owners to ponder:
Do you have an operating agreement and a buy-sell agreement?
Do you have a personal estate plan that assigns your interest in the company in a way that avoids probate?
Join us at our lunch and learn for business owners and professionals on March 24th, to hear Chris speak more on the topic of estate planning and succession planning for your business. For event details and registration, click here.
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