When you go on a vacation, you have a plan. You decide where you are going, how much you have to spend, you buy your tickets, make reservations, and create an itinerary (or not) for your time away. If you own a business, you also probably have a plan in place for your time away. Who will be in charge, what needs to be done, and who will be responsible.
But what happens if you pass away or become incapacitated? You also need a plan for your business should something happen to you. If a business owner dies without a clearly thought out plan, the partners, employees and family members of the deceased are left without direction and as a result potential conflict. Administering someone's affairs after their death can be a difficult, confusing, and conflict-ridden process if there is no plan in place, especially if there is a business involved. Communicating with your family and business associates to come up with a plan and then implementing a plan that is clear and concise can help avoid this.
There are several strategies that can be implemented as part of a business owner’s estate planning.
Companies with more than one owner.
A buy-sell agreement is a contract between LLC members, shareholders or partners which establishes a plan for the business in case one of the owners dies or becomes incapacitated. The principal benefit of a buy-sell agreement is that it establishes a sale price for the business (or how such a price will be established) and what your share of the business is. A buy-sell lets you document whether you want your partners to buy out your share, if you want to avoid certain individuals from having a role in the business, or if you want your heirs to sell your portion outright, either to co-owners or to the public. Since the business price has been established or a method to establish the price has been predetermined, family members know they are receiving a fair price.
As part of this buy-sell agreement, if the business assets are not liquid, partners often get the capital to buy out a deceased partner's shares from life insurance. A common business practice, each partner takes out a life insurance policy which names the other owners as beneficiaries. This strategy gives surviving owners tax-free proceeds to purchase the deceased's portion of the business from his or her estate.
In a family-run enterprise, you may have some beneficiaries who are involved in the business and others who are not. You may want to create a buy-sell agreement between the heirs; leave the business ownership to all heirs equally; or leave the business to the heirs that are involved and provide other assets for the ones who are not. There are many ways to plan for this scenario. Not planning for it is almost sure to lead to sibling strife,
Good business planning anticipates the future. A buy-sell agreement is a very simple, concrete way to ensure that your wishes for your business and estate beneficiaries are implemented without confusion or conflict.
If you're a sole proprietor, your business is you. You need a clear plan of action for what should take place after you're gone. Choose and prepare your successor if you want to pass on the business to another person. If you want your heirs to sell the business, make sure you communicate these wishes and provide a plan for the process. As with any small business owner, the key to successful estate planning is communication and implementation. You want to communicate with your family about your wishes for your business and you want to implement whatever documents are necessary to facilitate this process.