Succession Planning for a Family Business
by Alejandro U. Legal Marketer
If you own an interest in a small business, whether as a sole proprietor, partner, shareholder in a closely held corporation, or member of a limited liability company, estate planning can get complicated fast. If a substantial part of your estate is a profitmaking business of significant value, you’ll need to look into three broad areas:
- operation of the business after your death
- estate tax concerns, and
- avoiding probate.
Estate planning for the small business owner requires the assistance of an attorney experienced in the field.
Operation of the Business
The death of the sole or part owner of a small business is likely to seriously disrupt that business. If no planning has been done, the disruption can be catastrophic, sometimes resulting in the failure of the
enterprise. You need to have a sound succession plan. Who will take over the business? Will family members run it?
To keep business ownership in the family, one or more family members must be willing and able to run the business. If they are, and you’re the sole owner of your business, your main concerns are probably about dealing fairly with all your close family members.
If you share ownership of a business, you must consider the rights of the other owners, even if there are capable family members who want to inherit your share. Commonly, a partnership agreement, corporate bylaws, a shareholders’ agreement, or the operating agreement of a limited liability company (LLC) controls the disposition of a deceased owner’s interest in the business. You need to create a business estate plan that is in harmony with the documents that restrict your options.
Related read: How to send a demand letter?
One standard provision gives the surviving owners a “right of first refusal,” allowing them to buy the interest for the price offered by an outside would be purchaser. If there is no outside offer, another provision may provide a method for determining the value of the deceased owner’s interest in the business. A related issue here is whether the surviving owners must buy out the deceased owners’ share, or simply have the option to do so.
Avoiding Probate of a Family Business
It’s often disastrous for a small business to become enmeshed in probate. Not only is probate costly, but worse, it normally ties up the business under court control for a long time, often over a year. It can be burdensome, even destructive, to have to seek a probate court’s approval for business decisions. Would you want a judge supervising your business for months or years? You can plan to avoid probate of your business interest by using either joint tenancy or a living trust. For a number of tax and ownership reasons, a living trust is usually the best choice. You can setup up your own living trust forms as long as you make sure that they meet with the requirements for you state.
Although most business owners should plan to avoid probate, that’s not best for everyone. If your business has many debts and creditors’ claims, probate may be desirable, because it provides a convenient forum for having those claims resolved. These problems are unusual.
For most solely owned businesses, a living trust works fine. For the minimal cost of setting up a living trust, the business can be transferred to its new owners promptly, without any risk of loss of control while you live.
Shared Ownership Businesses
Living trusts also work well if you own your business together with others. Your ownership agreement should specifically permit each owner to transfer his or her interest to a living trust. If the document does not provide for this, you should amend it so that it does. Then, each owner creates his or her own living trust, consistent with any requirements of the ownership agreement (such as the right of surviving principals to buy out the deceased’s share), and transfers his or her interest in the business to that trust. The trust then works like any other probate avoidance living trust.
Created on Jun 22nd 2020 02:26. Viewed 101 times.