If you are a small business owner, you already know the financial and emotional commitment it takes to get a small business venture up and running. If your business has reached a point at which it is turning a profit year after year, you likely feel no small amount of pride in what you have accomplished. That profit is also likely important to the financial well-being of you and your family. Consequently, it is imperative that you include your business in your overall estate plan. To encourage you to do that, a Fargo estate planning lawyer explains why you need to include business succession planning in your estate plan and offers options for doing so.
Why Is Business Succession Planning Necessary?
As a business owner, you undoubtedly take steps to protect your business from all sorts of potential threats. You likely have your business insured against things such as theft or natural disasters. You probably keep a close eye on expenditures to ensure that your profit margin remains acceptable and you screen prospective employees with an eye toward productivity and growth. All of this is done to increase the value of your business as well as the income you earn from the business. While all of those steps are helpful – even necessary – what happens to your business if something happens to you? If you were to be killed or become incapacitated tomorrow as a result of a tragic accident, what would happen to your business? Consider the following questions:
- 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?
- Does the individual designated to take over have the legal authority to do so?
- 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 your business will be part of your estate, what will happen to the value of your interest in the business if it is sold?
- If your business is a family owned business 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?
- What will the tax implications be for your business should you die?
- Does the business have sufficient liquid assets to cover any tax debt that might be owed when you die?
How to Include Business Succession Strategies in Your Estate Plan
Recognizing the need to include business succession strategies in your estate plan is only the first step toward ensuring the continued existence and/or profit of the enterprise. If your business is a sole proprietorship and you plan to pass down the business to the next generation, using your Last Will and Testament to gift the business and its assets is not your best option. 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. Moreover, a direct gift in your Will does not allow you to retain any degree of control over the future of the business once the assets have been gifted. In addition, gifting your business leaves many questions about the management and profits of the business unanswered. Instead, you may wish to consider either of the following commonly used options:
- Family Limited Partnership – if you plan to keep the business in the family, a family limited partnership, or FLP, may be best for you and your family. You can maintain majority control and day to day management of the company for as long as you wish; however, your successor can also begin to learn the business while you are still around to provide guidance and advice. In addition, there are typically some significant tax advantages to creating an FLP.
- 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.
Contact an Estate Planning Attorney
If you have additional questions or concerns about business succession planning, contact an experienced estate planning lawyer at German Law Group by calling 701-738-0060 to schedule an appointment.