Family businesses have been the backbone of the American economy for centuries. In fact, according to the U.S. Bureau of the Census, about 90 percent of American businesses are family-owned or controlled. If you are the matriarch or patriarch of a family business, you undoubtedly hope that the business will continue to be successful and profitable long after you are gone in order to provide for future generations. One way to ensure that your business continues to thrive in your absence is to incorporate a business succession planning component into your comprehensive estate plan.
How Death or Incapacity Can Threaten Your Family Business
As a business owner, you probably had to struggle to get your business up and running and turning a profit. A small business faces all kinds of threats to its success, from economic downturns to natural disasters. Once a business is thriving, however, you cannot let your guard down. On the contrary, you must remain vigilant with regard to potential threats. One very real threat to the continued success of your business is your own death or incapacity. To better understand why, consider the following questions:
- If you are incapacitated tomorrow because of a catastrophic accident or debilitating illness, who will take over the immediate day to day control of your business?
- Is it clear to your employees, business associates, and family who will take over in your absence and will they accept that person as their leader?
- Does the individual designated to take over have the legal authority to do so?
- Will your family continue to benefit financially from the success of the business during your incapacity
- If you become permanently disabled or retire, who will take over your business?
- Will your business be included in the probate of your estate?
- If your business will be part of your estate, what will happen to the value of your interest in the business if it is sold and how will the value of your interest be determined?
- If your business is a family-owned business have you prepared the next generation to take over?
- Have you set up the proper legal structure for the business to facilitate the transfer to the next generation?
- What will the tax implications be for your business should you die and does the business have sufficient liquid assets to cover any taxes owed?
In the absence of a business succession plan, the odds are good that you cannot answer many of these questions. Consequently, the absence of a succession plan puts your business, and therefore the financial security of your loved ones, at risk.
How Can Business Succession Planning Help?
The good news is that a little planning can go a long way when it comes to protecting your family business. Business succession planning offers legal tools and strategies aimed at ensuring that your business makes a smooth and successful transition to the next generation or, in the alternative, that your loved ones receive the benefit of the true value of your interest in the business. A business succession plan must be carefully tailored to the business it is intended to protect. For that reason, you should work closely with an experienced business succession planning attorney when creating your plan. Some of the issues you will need to address, however, in your plan include:
- Transfer vs. Sell – make the decision as early on as possible whether you ultimately want to pass the business down to the next generation or sell your interest upon your death or incapacity. This allows maximum planning time for the transfer of ownership or to ensure a profitable sale.
- Transferring ownership. If you plan to pass the business down to the next generation, start the transfer long before it becomes necessary. Get your successor involved early so family members, employees, and clients/customers are comfortable with the change in management.
- Selling the business. Conversely, if you plan to sell the business, consider entering into a Buy-Sell agreement so your loved ones do not have to worry about valuing the business nor finding a buyer.
- Tax implications. One of the biggest threats to the successful transition of a family business from one generation to the next is taxes. If your business owes a substantial amount in gift and estate taxes, it could force the sale of necessary business assets. One solution is to create a Family Limited Partnership (FLP) that allows you to slowly transfer ownership of the business while maintaining control over the day to day operations. You may also wish to consider life insurance as a way to ensure sufficient liquidity in the event of your sudden death.
Contact New York Business Succession Planning Lawyers
Please feel free to download our FREE estate planning worksheet. If you have additional questions or concerns regarding the best way to protect your family business in the event of your death or incapacity, contact the business succession planning lawyers at the Law Offices of Kobrick & Moccia by calling 800-295-1917 to schedule your appointment.