As a small business owner, you have likely invested a considerable amount of time, energy and resources into your business. A proper estate plan, which considers your business interests and needs, will assist you to protect your business and reduce uncertainty for loved ones. The following five questions will get you thinking about what kind of business succession plan you want in place.
Who will run the business in your absence?
You should consider appointing a Power of Attorney to manage your business if you are unexpectedly disabled or temporarily unable to run the day to day operations of your business. For example, you likely will not be in a position to run the day to day operations of your business if you suffer a head injury or debilitating stroke.
Often small businesses are family affairs and you will want your children or your spouse to take over if you become unable to manage things. But what if your family members are not involved in the business and have no idea how to run it? Who do you want to take over? You may want to choose a senior employee who you trust and are grooming to take over the business or you may want to choose a management group to oversee business operations.
Do you have an up-to-date Will?
Similarly, you should plan for what will happen to your business if you die before you retire. Your Will should provide directions to your executors about how to handle your business and provide them with the necessary authority to carry out your wishes. You should also consider whether your executors have the necessary knowledge and skills to deal with your business interests and ensure the transition goes smoothly.
It is important for a small business owner to regularly review his or her Will. Regular review will make sure your Will addresses any significant changes relating to your business and that your Will operates in a way that conforms with your last wishes.
Should you have a buy-sell agreement or a survivor’s business plan?
Businesses with more than one owner will benefit from having a buy-sell agreement which sets out how the business interests of the deceased will be handled. In this type of agreement, you may require the surviving owner to purchase the deceased owner’s portion of the business to avoid the deceased’s family members from becoming unintentional owners. If you decide to have a buy-sell agreement, you should consider how the surviving owner will fund such a purchase and ensure that your overall business plan addresses this issue.
A survivor’s business plan is not legally binding like a buy-sell agreement, but it is a step which will ease the transition if you die or become mentally or physically unable to run your business. Such a plan will best assist your loved ones by setting out the net worth of the business, including any vital tax information, and listing critical business goals, employees, or initiatives.
Do you have a proper insurance plan?
You may want to consider getting key person insurance where the skills of an employee or yourself are critical to the ongoing success of your business. Key person insurance may provide you or your business with a much needed buffer for handling business expenses related to the loss of a key person.
Having adequate life insurance and disability insurance are also important for small business owners to provide income for family members, ensure ongoing business operations or manage taxes owed on your death. Your insurance needs will depend upon the cash reserves of your business and your non-business assets, and it is best to consult an insurance specialist about what policies will best suit your situation.
Are there ways you may minimize tax consequences for your estate?
Business owners may minimize tax consequences for their estate by using an estate freeze during their lifetime. An estate freeze allows a business owner to transfer future growth to the next generation and cap the amount which the current owner will be taxed on death. Establishing a trust may also assist to minimize tax consequences for your estate. It is best to consult with tax and legal experts to implement an estate freeze or establish a trust.
No matter your business or situation, a well thought out plan for running your business in your absence or dealing with your business on your death will assist you to protect and preserve your business and avoid uncertainty for loved ones.