BUSINESS SUCCESSION PLANNING

I own a business. How does my business affect my estate plan?

There are numerous ways in which your business affects your estate plan.  If you are a sole proprietor or member of a partnership, the business assets (and expenses) will generally be considered part of your estate property.  If you are the owner of a limited liability company, corporation, or other like business entity in which you own equity (such as stock or a membership interest), this equity will likely be considered an asset of the estate.  There are a number of specific tools that both a business and a business owner can use to address equity ownership, such as what is commonly called a “Buy-Sell Agreement.”  The needs of a business owner are unique and should be carefully and fully evaluated with a licensed attorney or tax advisor as part of an owner’s estate plan (and should also be evaluated as part of the owner’s spouse’s estate planning process).

 

Another important matter to consider is how your death may affect a business you own.  Aside from the impact of the assets and equities on the estate plan of the business owner (and his or her spouse if married), the operation of a small business may be disrupted upon the owner’s death.  The owner may not have a succession plan in place and may not have someone authorized to act on behalf of the business (for example someone authorized to send and receive payments for the business, process payroll, and make appropriate legal and tax filings for the business when due).  Both the owner’s estate and the business’s succession should be considered as material parts of a comprehensive estate plan.

How Does a Buy-Sell Agreement affect my estate plan?

In general, a Buy-Sell Agreement specifies certain treatment of the owner’s equity (such as stock in a corporation or membership interests in a limited liability company) when the owner dies, retires, and/or becomes incapacitated.  One of the main reasons Buy-Sell Agreements are used is to ensure owners do not transfer their Equity to people outside the business.  Another common reason is to ensure that the individual(s) receiving the dead owner’s equity instead receive a certain value for the equity instead of the uncertainty and difficult position that may come with being an uninvolved equity owner in a business.  There are many other reasons a Buy-Sell Agreement may be used, and the specific terms of this agreement can vary greatly and will impact the owner’s estate planning.   For additional information, see the Article: A Primer on Buy-Sell Agreements, included in the free educational materials.

How is my company given away when I die?

It depends on a number of factors.  Some factors include (i) whether the business is a sole proprietorship, partnership limited liability company, or corporation; (ii) who owns the entity; (iii) whether there is a buy-sell agreement; (iv) whether there are restrictions on stock (in the case of a corporation) or membership units (in the case of a limited liability company); (v) the terms of the bylaws, operating agreement, partnership agreement, or other similar, legally binding documents; and (iv) a number of other factors.  For this and other reasons, anyone who owns a business should seek the advice of an attorney on these matters.