Small business ownership is on the rise once again in America. That means I have more clients who come to me with a family business they want to protect as part of their estate plan. The most important advice I give those clients is to stress the need for succession planning. A family owned business in unlike any other asset which might be part of an estate. It requires special consideration. If you own a family business, I urge you to learn more about succession planning as well. Without a business succession planning component in your estate plan, your family business is at significant risk anytime something happens to you.
Family Business Ownership
A family business typically operates in much the same way as any other small business; however, there are some unique challenges a family business may face, both during the operation of the business and when it’s time to transition the business to a new owner. These challenges highlight the need to incorporate succession planning in your comprehensive estate plan. To better understand the need for planning, consider the following questions:
- If an accident puts you out of commission tomorrow, who will take over the immediate day to day operation of your business? Does that person have the legal authority necessary to run the business? Will your employees, business associates, and family members accept your successor’s authority?
- If you become permanently disabled, or retire, who will take over your business? Will your family continue to benefit from the business’s success in your absence?
- Will your business go through probate following your death? If so, what will happen to the value of your interest in the business if it is sold? What will the tax implications be for your business? Does the business have sufficient liquid assets to cover any tax debt that might be owed when you die? How will your family get by financially during probate?
- If you plan to pass the business down to the next generation, have you prepared your successor to take over? Have you set up the proper legal structure for the business to facilitate the transfer to the next generation?
These are just a few examples of questions that need to be answered if you want your family business to survive if something happens to you. A family business succession plan can answers all these questions, and many more.
What Should Be Included in My Family Business Succession Plan?
Because no two family businesses are identical, no two business succession plans are exactly the same. Nevertheless, there are some common considerations that should be addressed as well as some commonly used tools and strategies that you may wish to utilize in your plan.
The first – and usually most important – issue that must be resolved is deciding whether any of your children will be taking over the business upon your incapacity, retirement, or death. If none of them are interested in taking over, you may wish to enter into a Buy-Sell Agreement which ensures that your loved ones will be entitled to the full benefit of the value of your interest in the business. A Buy-Sell Agreement works best when you have a partner; however, you can enter into one with an uninterested third party. In short, a Buy-Sell Agreement allows you to determine ahead of time what your interest in the business is worth or, in the alternative, provides an agreed upon method of valuing the business when the time comes. Your partner(s) (or a third party) agrees to purchase your interest in the business at the agreed upon price or using the agreed upon valuation method should certain events occur. Your beneficiaries receive the profits from the sale.
In the event that the business will be passed down, you may want to create a Family Limited Partnership (FLP) (or Family Limited Liability Company (FLLC)). With an FPL, you maintain majority control and day to day management of the company for as long as you wish; however, your successor can also begin to learn the business while you are still around to provide guidance and advice. You are also able to slowly transfer your legal interest in the business to your child(ren) over time which produces some significant tax advantages both while you own the business and when it comes time to probate your estate.
Contact Chapel Hill Business Succession Planning Attorneys
If you have questions or concerns about planning for the future of your family business, please contact the Chapel Hill family business succession planning attorneys at Clarity Legal Group® by calling us at 919-484-0012 or contact us online.