Small businesses are often caught up in growth cycles, profits and ensuring that products arrive to consumers on time. The life of a small business owner is a hectic one with a lot of owners failing to follow basic estate planning and business law practices.
“I’m young. What will happen to me?”
Everyone business owner starts out with the goal of living long enough to see their business become a success, but there are no guarantees. Estate planning can work to keep your dream alive and help maintain your business well after your death.
Three ways that estate planning helps small business owners is:
1. Protects Against Unfamiliar Owners Via Buy-Sell Agreements
Small businesses don’t have to be one-man operations. In fact, a lot of small businesses are partnerships between family members or good friends. The problem is that one of the owners will die before the other.
And if this happens, your business will be in jeopardy if a buy-sell agreement isn’t in place.
Buy-sell agreements are a great estate planning option for business partners. What this agreement does is:
- Ensures the family members of the deceased do not gain control of the business
- Automatically allows other owners to purchase the owner’s share in the company
If a buy-sell agreement isn’t in place, you may have to deal with your partner’s long lost cousin Joey that he last saw 30 years ago becoming part owner in your business.
2. Set a Succession Plan in Place
Succession plans allow your company’s vision to remain at the forefront of your business. You have a vision for your company, and you know who will be the right fit to keep your company’s vision going well after your death.
Your succession plan will:
- Identify and develop new leaders
- Identify key people to fill a business’ goals
Succession plans are put in action well before an owner’s demise so that their wishes can be upheld. A lot of companies do not have a succession plan in place, but it’s smaller businesses that suffer the most due to a lack of competent experience and skills in their workforce.
The drafting of a succession plan will also alleviate many of the family arguments that come after a person’s death.
3. Eliminates Unnecessary Tax Burdens
Tax burdens will weigh heavily on your family following your death. A business that is operational and making money will have assets and hefty tax burdens for heirs. If a majority of your wealth is tied into a business, you must take the proper steps to help remove these unnecessary tax burdens from your business.
Business owners have a few options at their disposal:
- Gift family members shares in the business during their lifetime
- Stocks can be redeemed at a lower tax rate than cash
- Estate taxes, under IRS Code Section 6166 can pay estate taxes in installments
When a business lacks liquidity, it’s understandable that the heirs to the business may not be able to pay the 35% – 50% estate tax on the business. Lawmakers are working to eliminate the estate tax, and there are no taxes assessed on an estate with a value of $5.49 million in 2017.
A lengthy and frequent discussion with an estate planner that has a business law background is recommended. You’ll find that an estate planner can ensure that your family is financially sound after your death and that your legacy continues on with your family business.
There are several other forms of estate planning that will help, too. A will and life insurance are two of the estate planning options that every business owner must have to ensure their family’s financial safety.
