Business owners often immerse themselves in the day-to-day operations of their businesses. This is called “working in the business” but equally as important, they should concentrate their efforts on “working on the business” – ensuring that there is a plan for its continuity. As a business owner, you are probably the face of your company; your clients love you and your contractors and suppliers appreciate you for what you’ve built and the income stream you provide for them.
In the unlikely but possible event that you are sidelined by a serious accident and are severely injured or killed, or that you are the victim of a sudden, unanticipated illness (think COVID) leaving you unable to make decisions or care for yourself and your family, what will become of your business? The future holds uncertainty and this is a possibility at any time, so business owners must develop and implement comprehensive estate and succession plans. Here is why:
1. Wealth protection. Operating a business can be most profitable, providing substantial wealth for the owner and his or her family. Without an estate plan, that wealth is exposed to and becomes susceptible to the claims of creditors and predators. If the business owner dies and leaves a will or, even worse, no will at all, the owner’s money and property will be subject to probate. This leaves the estate at the mercy of a probate judge to decide how the decedent’s assets will divided and how property will be distributed. This is a time-consuming and public process that is leaves the estate open to scrutiny by the public – including creditors.
Without an estate plan in place, what you leave to your loved ones is exposed to creditors attempting to satisfy debts or to predators wanting to benefit from your created wealth. When in a divorce, a disgruntled spouse of your child tries to claim part of your child’s inherited wealth, a well-conceived estate plan can protect against this danger. A will can make known your bequest of property, but non-public legal documents such as trusts, buy-sell agreements, and personal and company agreements are often more useful for both business owners and their heirs.
2. Business Continuity. Every business, whether a professional practice or a wholesale or retail business, should and MUST have a succession plan. Without estate and succession plans for a business owner, there is no way to address how the business will continue without its most key employee. In many instances, the business owner’s company is a primary source of income for the owner’s family. With the disappearance or failure of the business, the owner’s family is without the financial means to carry on. Similarly, employees who rely on the continuity of the enterprise will be left without future income. Without an estate plan and/or succession plan the future of the business is left in doubt.
3. Avoidance of state law defaults. Business in the United States is governed by combination of federal and state laws. Business entities such as corporations and limited liability companies (LLCs) generally are governed by state law and for example, default rules about what happens to a business in the event of a business owner’s death or incapacity may not align with your wishes. Under some states’ laws, a limited liability company must be dissolved when the last surviving member of the LLC dies. Some states’ laws allow a business owner to leave his or her economic rights to family members without their having management or decision-making authority. If a business owner does not want to saddle his or her heirs with ongoing responsibility for operating the business, the owner can make provisions for handling these situations through his or her estate and business planning documents.
4. Minimizing estate and gift taxes. If your business has been successful, you may be subject to substantial gift taxes during your lifetime life and estate taxes after death. Proper estate planning can insure that your family members retain a substantial portion of your wealth rather than surrendering it to satisfy these taxes. A competently drafted estate plan will take into consideration all possible legal means to avoid taxation.
5. Clearly stating your wishes for your legacy. The sum total of a person’s life is his or her legacy, and often for a business owner, that is the business enterprise.Before you die, you want to leave guidance about how to run your business. You’ve built your business through hard work and dedication and have guided your employees with your inspiration and insight. You want that inspiration and insight to be part of your legacy. In creating an estate plan, beyond dealing with the nuts and bolts of asset distribution and taxation, you should consider:
- o Your guiding principles and values;
- o The future well-being of your clients and employees;
- o The business’s mission;
- o Future company leadership; and
- o The ability of the business to be sold.
Now that you understand more clearly the necessity of creating both an estate plan and a business succession plan, we invite you to contact us at www.aginslawfirm.com, email@example.com, or call (480) 401-2660 to schedule a consultation.
Richard H. Agins, Esq.