Small business owners have spent the past two years learning valuable lessons in flexibility, remote management, and succession planning. Even so, only 58% of small business owners have a succession plan in place. Without both a succession and estate plan in place, entrepreneurs risk their business failing in the event of disability and death. Businesspersons care about the longevity of their business – so why are 42% of business owners without a succession plan? In this article, you will learn why succession and estate planning is crucial for small businesses, and how you can ensure business continuity during unexpected times.
Defining Business Succession Planning First, let’s start off with the basics – what is a succession plan? A succession plan is a written document that defines the structure of your business and passes control of your business to your designated successor(s). You may be wondering – why is succession planning important for my business? If drafted correctly, a succession plan provides a guideline for how the business should be run according to your wishes. This ensures a smooth transition of power.
Differences Between Estate Plans and Succession Plans A succession plan and estate plan are equally important for small business owners and are not mutually exclusive. An estate plan is a set of documents that enables you to carry out your medical and financial wishes during and after your lifetime. In contrast, a business succession plan provides a continuity structure for your business in the case of death or disability. When prepared correctly, the two documents provide heirs and business successors with a clear guideline for how to run your organization and how to handle business assets. Without one or the other, your business faces costly probate and potential failure instead of an organized, planned transition.
Before we dive into the specifics of estate planning for small business owners, let’s look at a list of questions and documents that will help prepare you for building your business succession plan:
Questions for Small Business Owners Building Succession Plans
- What are your personal and business short-term and long-term goals?
- Who would you want to take business operations if you become unexpectedly ill and are unable to make business decisions?
- Is the business being transferred to heirs?
- Who will run the business after your passing?
- Do I want to implement a buy-sell agreement in the event of my death?
Checklist for Small Business Succession Planning
- List of potential successors
- List of potential options for exiting the business
- Standard Operating Procedures (SOPs)
- Employee handbook
- Company policies
Answering the above questions and preparing necessary documents will give you a good foundation for a solid business succession plan.
Estate Planning for Small Business Owners Everyone with assets should have an estate plan. Protecting personal and business assets are equally important and an estate planning attorney can work with you and your family to provide legal advice that could save your estate from costly and stressful probate. Here are some estate planning tips for small business owners:
- Start with your basic estate planning documents. Wills, power of attorneys, and living trusts are the two most common estate planning documents to start with. Make sure you update your documents annually, so they are up-to-date and consistent with your wishes.
- Plan for tax efficiencies. An estate planning attorney can help determine how state and federal estate tax will impact the transfer of your assets after death.
- Determine who is going to take over the business. Ask yourself, “who will take over my business”. While immediate family members may be a clear decision, some entrepreneurs decide to transition the business to key employees after death. It is ultimately your decision, but you will want to have an open discussion with your loved ones before or after speaking with an attorney.
- Account for life and disability insurance.
- Keep your succession plan consistent with other estate planning documents. Your personal assets and business assets should both be considered when preparing for retirement. Since tax and estate laws are constantly changing, you should reach out to your CPA and estate planning attorney every year to update your documents.
Meeting With an Estate Planning Attorney for Business Planning At The Germany Law Firm, we help small business owners protect their assets and their legacy. We specialize in small business succession and estate planning. Call us today to set up an initial consultation.
