Estate Planning Applies to Small Businesses
Estate planning doesn’t just apply to families, but to small businesses as well. Small business owners must think about the future. What if you became incapacitated and no one could pay bills or operate the business on your behalf because there were no powers of attorney ready? What if the primary owner died unexpectedly and left the business in disarray because no one could make financial decisions?
The default to no planning may result in your small business being forced to go through the probate process. While being managed by an unknown court-appointed agent, which can cause significant delay and loss of substantial value.
According to Bloomwell, 65 percent of entrepreneurs have no documentation in place to protect their small business in case something happened to the primary business operator. Small business owners and self-employed folks often forget that estate planning is an essential. Estate planning prepares you and other owners or partners.
Succession planning is a subset of estate planning that helps small business owners imagine those worst-case scenarios and then develop a plan. It’s also a means of passing on a small business in a well-thought out manner so the original owner can retire early or sell the business. Some essential questions to think on include:
- Who would be the best person to handle the finances and make sure bills and payroll are paid on time?
- Who could I trust to manage the business if I retire early, have an unforeseen medical event, or become incapacitated?
- Who would be the best person to interact with clients and manage the workload?
- Who would I want to pass the business to, or would I want the business to be sold or dissolved?
Those are just a few of the questions to get you started in your preparations. Now let’s look at which documents you need to protect your business.
Financial Power of Attorney
The power of attorney would give your named agent the power to make financial decisions on behalf of your business. This includes paying bills, paying taxes, issuing payroll, using company funds to make purchases, stock decisions, and overall access the business’s financial accounts and records.
This document sets forth agreements between owners with regard to how to continue the business if one member wants to sell their interest, becomes incapacitated or dies.
This document sets forth the contract partners or shareholders in a business have made with regard to purchasing out the membership of an owner who has become incapacitated or died. Often a life insurance policy will fund the buyout and allow the remaining business owners to continue the business while making the survivors of the owner whole.
Living Trust and/or Last Will and Testament
The default to not having an operating agreement or buy/sell agreement is that the shares or ownership interest in your business would be governed by your trust or will. These documents set forth the distribution of the ownership of your assets (which would include your business ownership interest) after you have passed. This may leave your partners unexpectedly operating the business with your beneficiary, who may not understand or be interested in its operations.
With a sole proprietorship, it may be that personal and business assets are combined or mixed in some way, which could complicate matters for your survivors unless your documents set forth a clear plan to wind up the business. In addition, many LLCs are able to separate business succession decisions from decisions regarding personal assets with proper planning
Talk to your trusted estate planning attorney to make sure that you have protected your hard-earned business asset and that your love ones have every opportunity to maximize its value when you are no longer able to provide for them through your work.