You poured your heart and soul into your business, and it’s hard to imagine a time when you won’t be running it. But life happens, as do unplanned events. If you haven’t thought about small business estate planning yet, you’ll need to decide what will happen to your company if you pass away unexpectedly, retire or become disabled.
Maybe you plan to leave your business to your children, another family member or even an employee. Or perhaps you have a business partner who will assume the entire operation. Now’s the time to talk it out, create a plan and get it in writing.
Small Business Estate Planning
Three in five small business owners don’t have a succession plan in place, according to a Nationwide survey. A succession plan spells out what happens to the business when you’re no longer running it due to death or retirement.
If you die without an estate plan and you’re a sole proprietor, your business is considered one of your assets to be distributed to your beneficiaries. If the business has debt, it will be liquidated to pay any balances, and the remaining amount will be distributed according to your will.
If your business is structured as a corporation, ownership transfers to the owners of your shares. If you don’t have shareholders, the business would transfer to your estate. If your business is a limited liability company (LLC) or partnership, your operating or partnership agreement will specify what happens in the event of your death.
Your small business is an asset that should be in your will. If you die without a will, a probate court will value the proceeds, with the state distributing the funds. Your family, business partners and employees will undergo stress through the process, as probate courts can be expensive and time-consuming, holding up the settlement for months. Your business could also lose some of its value if the IRS charges an estate tax.
How to Plan for Retirement
When you’re planning for retirement, deciding your company’s future can be more uplifting, but the estate planning process is similar. It’s important to choose a successor who will take over ownership of the company. The conversation with the potential successor should be very open and honest. You don’t want to assume your child wants to run your business. If they’re not passionate about it, you could see your life’s work dwindle away if it’s poorly run, even risking bankruptcy.
Whether you sell your business or transfer ownership to a family member or employee, spend at least a year before you retire training the new owner to take the reins. Make it official so other family members understand your wishes as well as the arrangement.
Start the Planning Process
It’s never too early to start small business estate planning. In fact, you should create a plan as soon as your company is making a profit. It can feel uncomfortable and you might think the transition is years away, but having a succession plan is one of the most important steps you will ever make as a business owner.
Start by having conversations with your heirs, and put your business and your wishes in your will. This is especially important if you have more than one child and are leaving the business to just one of them.
Meet with an estate-planning attorney who knows your state laws around inheritance. They can walk you through the legalities of selling or leaving a business to someone else.
Consult with a financial planner who can help you decide how to plan for retirement. They will help you assess your business’s worth so you can plan to sell it, or better decide how to distribute ownership among your family members.
Then create a formal succession plan, leaving the team with a detailed outline of how to run the business in your absence. This will become their playbook, and you will want to include as much information as possible to ensure their success.
When you plan for your company’s care after your time at the helm, you’ll leave a legacy behind. Your business is your life’s work; make sure your exit from it is treated with the same thought and consideration that went into starting it.