Owning a small business has long been part of the American dream. If you have realized that part of your American dream, it undoubtedly took a great deal of hard work and sacrifice to get your business off the ground. Â Now you need to make sure your investment is protected. One way to do that is to include business succession planning in your comprehensive estate plan. If you are not familiar with the concept of business succession planning, there is no time like the present to learn. Toward that end, the Vernon Hills estate planning attorneys at Hedeker Law Ltd. explain the need for business succession planning as well as some common strategies and tools you may decide you incorporate into your plan.
Why Is Business Succession Planning Important?
Business succession planning is necessary to protect your financial â and even emotional â investment in your business as well as to ensure that it makes a successful transition to the next generation, if that is your wish. To illustrate the importance of business succession planning, ask yourself the following questions:
- If you are incapacitated tomorrow, for any reason, 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 the event of your incapacity, retirement, or death?
- Does your designated successor have the legal authority to take your place?
- Will your family continue to benefit from the businessâs success in your absence?
- Will your business be included in the probate of your estate? If so, what will happen to your financial interest in the business if it is sold?
- Have you considered how the value of your interest in the business will be ascertained at the time it is sold or transferred?
- If your business is a family owned business that you plan to pass down, 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?
- Are sufficient liquid assets available to cover any tax liability that may arise when you die?
If you do not have the answers to these questions figured out yet, do not be alarmed. These are the types of issues included in a business succession plan.
Business Succession Planning Strategies
Eventually, you will need to transfer or sell your interest in the business to someone else, either because of incapacity or retirement, or at the time of your death. Planning for that eventuality is part of business succession planning. There are several methods that can be used to pass down or sell your interest, including:
- Gifting in your Last Will and Testament â if your business is a sole proprietorship you can simply gift the business and all the business assets to someone in your Will. There are a number of reasons why this is not the best option, as your attorney can explain, with one of those reasons being the likely tax liability.
- Entering into a Buy-Sell Agreement — this option is often used when there are partners involved who are not family members. 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) agrees to purchase your interest in the business should certain events occur. This ensures the continuation of the business and a fair price for the sale of your interest in the business, the proceeds of which will then become part of your estate or will go directly to your loved ones.
- Family Limited Partnership â if you wish to pass down your business to the next generation, a family limited partnership, or FLP, may be best the best option. With an FLP, you maintain majority control of the business, allowing you to continue to control the day to day management of the company for as long as you wish. At the same time, you can start gifting limited partnership shares to children and/or grandchildren who can then begin to learn the business. You also gain significant tax advantages by creating a FLP that can save your business from paying a high tax bill upon your death.
Contact Vernon Hills Estate Planning Attorneys
For more information, please download out FREE estate planning worksheet. If you have additional questions or concerns regarding business succession planning, contact the experienced Vernon Hills estate planning attorneys at Hedeker Law, Ltd. by calling (847) 913-5415 to schedule an appointment.