An often overlooked aspect by a small business owner is taking steps to protect their business in the event of their death. So much time is spent on building and maintaining the business that little time is spent thinking about what happens when the principal business owner passes away. And yet, estate planning for the small business is just as vital as for an individual or family.
The first step of estate planning for the small business is to think about how the business will continue to operate after your death. Take a moment right now to really think about that possibility! Do you have people designated to run the business after you? Is there sufficient cash on hand or insurance proceeds to fund the business? One cannot close down the business for several days and then just “reopen” the doors assuming that business will not be affected. The highest and best value of a business is a “going concern.” This means that the value of a business will suffer a serious decrease once the doors are locked.
One of the biggest problems that the small business owner faces is the situation where there is more than one beneficiary to inherit the business but not all are active in the business itself. There is the dilemma of providing equal distribution to the heirs, while preventing the beneficiaries who are not active from interfering with the business operation. The formation of a corporation, limited liability company and/or limited partnership can become a valuable tool in dividing the economic and management interests of the business.
If the business is operated as a sole proprietorship, then the business will be inherited by beneficiaries listed in your Will or, if you do not have a Will, by the beneficiaries as designated by State law. Are those beneficiaries ready, willing and able to step in and operate a business? If not, you need to identify and designate individuals who have the ability and desire to maintain the business immediately following your death. If the beneficiaries are not interested in keeping the business in the future, you should consider making an arrangement for the sale of the business to a particular individual or company prior to your death.
The transfer of the management and/or ownership of a company is much easier if the company is a corporation or limited liability company. But even in these cases, there is very often one key owner or key person operating the firm. Buy/Sell agreements which will transfer the ownership of those shares or membership interests to remaining stockholders or members become much more frequent in this situation.
One big advantage that a corporation or a limited liability company has in the estate planning arena is that the key owner has the ability to distribute an interest in the company to his or her beneficiaries during their lifetime. This is especially useful on the tax planning of the decedent’s estate, and these transfers can be set up while simultaneously minimizing the impact on the management decisions for the company.