If you are a small business owner, you have likely invested a considerable amount of your time and money getting your business off the ground and operating smoothly. If your business is now turning a profit, and your family depends on that income to bill the bills and maintain the lifestyle to which you are all accustomed, it is crucial to protect that income. You have probably purchased business insurance to protect your business from a variety of threats, such as theft or a natural disaster; however, is your business protected from the impact of your death or incapacity? The Grand Forks business succession planning attorneys at German Law explain why business succession planning is an often overlooked, yet vital, component of estate planning for a small business owner.
Why Is Business Succession Planning Important?
Business succession planning is necessary to protect your financial – and even emotional – investment in your business as well as to ensure that it makes a successful transition to the next generation, if that is your wish. To illustrate the importance of business succession planning, ask yourself the following questions:
- If you are incapacitated tomorrow, for any reason, 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 in the event of your incapacity, retirement, or death?
- Does your designated successor have the legal authority to take your place?
- Will your family continue to benefit from the business’s success in your absence?
- Will your business be included in the probate of your estate? If so, what will happen to your financial interest in the business if it is sold?
- Have you considered how the value of your interest in the business will be ascertained at the time it is sold or transferred?
- If your business is a family-owned business that you plan to pass down, 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?
- Are sufficient liquid assets available to cover any tax liability that may arise when you die?
Business Succession Planning Strategies
Eventually, you will need to transfer or sell your interest in the business to someone else, either because of incapacity or retirement, or at the time of your death. Planning for that eventuality is part of business succession planning. There are several methods that can be used to pass down or sell your interest, including:
- Gifting in your Last Will and Testament – if your business is a sole proprietorship you can simply gift the business and all the business assets to someone in your Will. There are a number of reasons why this is not the best option, as your attorney can explain, with one of those reasons being the likely tax liability.
- Entering into a Buy-Sell Agreement — this option is often used when there are partners involved who are not family members. In short, 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.
- Family Limited Partnership – if you wish to pass down your business to the next generation, a family limited partnership, or FLP, may be best the best option. With an FLP, you maintain majority control of the business, allowing you to continue to control the day to day management of the company for as long as you wish. At the same time, you can start gifting limited partnership shares to children and/or grandchildren who can then begin to learn the business. You also gain significant tax advantages by creating a FLP that can save your business from paying a high tax bill upon your death.
Contact a Grand Forks Business Succession Planning Attorney
Please join us for an upcoming FREE seminar. If you have additional questions or concerns about elder law, contact a Grand Forks succession planning attorney at German Law by calling 701-738-0060 to schedule an appointment.