It’s inevitable: There comesa time when every independent business owner must address issues affecting thefuture of the company. Key to planning for future growth is a businesssuccession plan – a comprehensive look at the estate-planning picture, whichcan include components like shareholder buy-sell agreements, management plansand any other documentation ensuring the smooth operation of the business.
While traditional estateplans are designed with tax minimization in mind, business succession planningis aimed at maintaining the future health of your business.
Different types of businessesshould exercise different planning strategies. For example, proprietorships andpartnerships must cease operation as such upon the death of the owner or apartner. Although a partnership agreement will generally provide for thecontinuation of the partnership by the surviving owners, some provisions mustbe made for acquisition of the deceased partner’s interest. A soleproprietorship cannot be continued in the same manner as can a partnership, butproprietorship assets can pass by will to the decedent’s intended successor.
If proprietorship assets arenot specifically bequeathed to a child or another who has been identified asthe intended successor, they will pass under the general disposition provisionsof the will. During the probate process, the executor would be responsible foroperating the business, which could result in business losses. To avoid thisand other potential problems, it is critical to create a business successionplan.
To promote continuedoperation of a sole proprietorship, you might consider writing specificinstructions with respect to management of the business after your death,providing some guidance to a successor proprietor, such as a spouse or child.Keep in mind, though, that your successor will have full control of businessoperations and could choose not to follow your guidance.
Another option is to convertyour sole proprietorship to corporate form while you are still alive. Since acorporation has continuity of life, doing so many help you avoid some of theissues confronting a sole proprietor at death. Nevertheless, it is stillimportant to appoint competent management for the transition.
In addition, considerpurchasing life insurance and disability income insurance to help yoursuccessor meet estate tax obligations, replace an owner’s loss of income due todeath or disability, and ensure a partner or existing employees have the cashrequired to buy out your share of the business.
An estate planning teamconsisting of your lawyer, accountant and financial representative can help youdevelop a business succession plan with all of the necessary documents andinformation.
– Source: Tire ReviewBusiness Toolbox
