Special Considerations for Small Business Owners

For most small business owners, your business is, aside from family, the primary focus of your life.  Not only is it your main source of income, in many cases it’s your most valuable asset.  It is also an asset of unique character.  The ongoing value of a business depends greatly on its being actively and capably managed.  A lapse, even temporarily, upon your death or in the event of your incapacity can cause a substantial, even devastating, loss of value.  It is a sad, but undeniable, fact that about two-thirds of all businesses fail to successfully navigate the transition from one generation of ownership to the next.

Here are some critical components of estate planning for any small business owner:

Succession Planning/Interim Management

Obviously succession planning is a necessity as a small business owner approaches retirement, but even if you are a young business owner decades from retirement, you should consider who would take over if you were gone. For a sole proprietor, there may be no one to step in and continue to operate the business. In that case, arranging for interim management until the business can be sold or closed down and the value of its assets fully realized makes sense. For a business entity with a management team, having a clear succession plan can help to ensure a smooth transition and minimize the risk of in-fighting that can doom a business when the question of “who is in charge now?” must be addressed after the original owner is no longer present.

Business Buy-Sell Agreement

If a family member, partner, key employee or perhaps the owner of a similar business will be taking over your business and there are the interests of heirs or shareholders to consider, you may want to create a buy-sell agreement for a several reasons. First, it will make clear what you intend for your share of the business. Second, it will establish a way for heirs or shareholders to realize the value of your share of the business. Third, it can determine how your share of the business will be valued. Having a valuation method in place can speed up the sale process and, if it is well crafted, avoid disagreements over the value of the business.

Key Person Insurance

Insurance can be a very important part of a small business estate plan. One type to consider is “key person” insurance.  It is purchased by the business on an individual or individuals whose contributions are crucial to its success. In the event that a key person dies or is disabled and can’t work, the policy proceeds are paid to the business and may be used for a variety of purposes, such as to repay loans, to replace income lost during a transition period, or to purchase the key person’s ownership share in the business.  This is never just a matter of buying insurance; your estate planning documents will be of critical importance toward assuring that the insurance proceeds are paid and applied in strategic and beneficial ways.

Life Insurance

Individual life insurance also can play a role in a small business estate plan in other respects. For example, if you and a partner have a buy-sell agreement allowing the surviving partner to purchase the business in the event that one of you dies, then you each could purchase a life insurance policy on the other with a face value sufficient to fund the purchase, in accordance with the terms of your buy-sell agreement.  Life insurance can also be of critical importance toward assuring that the business has sufficient cash available to meet its ongoing needs (and the cost of replacing the deceased owner’s contributions), either pending the transition to a new owner or to allow time to find a buyer for the business or assure that as much of its value as possible will be realized upon its liquidation.

Tax Planning

If you want to pass your business on to your heirs, the sooner you start planning the transfer the better, since you may be able to take advantage of strategies that will result in lower taxes than if the business is passed on at death.  The development and implementation of a tax planning strategy is best accomplished with input from your business/tax attorneys, your estate planning attorney, and your CPA.

One of Better Estate Planning’s core concepts is that the estate plan of any small business owner should serve an important role in assuring that the value of your small business will be realized for the benefit of your loved ones after you’re gone.

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