Succession planning is an important aspect of owning a small business, but many business owners put it off. After all, their focus is usually on growing the business so they have something worthwhile to pass on. And yet, according to the University of Connecticut Family Business Program, “[i]n nearly half (47.7%) of all [family owned business] collapses, the failure of the business was precipitated by the founder’s death, or in 29.8% of the cases, the owner’s unexpected death. Only in relatively few instances (16.4%), did the business failure follow an orderly transition, and in situations where the owner was forced to retire, the figure drops to 6.1%”. In short, failing to plan is planning to fail.
In this blog post, we will explore some key considerations for estate planning for your small business, including choosing a successor, creating a will or trust that takes into account the special nature of closely held businesses, and managing tax implications.
Estate Planning for a Small Business
Choosing a Successor
One of the most important decisions you will make when planning your estate is choosing a successor for your small business. This person should be someone you trust to carry on your legacy and run your business according to your vision. Some options include family members, business partners, or employees who have demonstrated strong leadership skills.
Once you have identified a potential successor, it can make a lot of sense to involve them in the estate planning process, especially if they are family. This will give them a better understanding of your wishes and allow them to prepare for the responsibilities and intricacies of taking over your business.
Creating a Will or Trust
Creating a will or trust is an essential part of estate planning for small businesses. This legal document will outline your wishes for how your assets should be distributed after you pass away. It is important to work with an attorney who specializes in estate planning to ensure that your will or trust is legally binding and accurately reflects your wishes.
When creating a will or trust, it is important to consider not only your business assets, but also your personal assets. This includes any real estate, investments, and personal property you own. By including all of your assets in your will or trust, you can ensure that your entire estate is distributed according to your wishes.
Managing Tax Implications
Estate planning for small businesses also involves managing tax implications. This includes both estate taxes and income taxes. Estate taxes are taxes that are assessed on the value of your estate after you pass away. It is important to work with an accountant or financial advisor to understand the potential tax implications of your estate plan and develop strategies to minimize taxes.
In addition to estate taxes, it is important to consider income taxes when planning your estate. For example, if your business is structured as a pass-through entity such as a sole proprietorship, partnership (including LLCs), or S corporation, the income generated by the business is passed through to you as the owner and taxed at your individual tax rate. It is important to consider how these tax implications will affect those who come after you.
In conclusion, estate planning is a critical aspect for small businesses. By choosing a successor, creating a will or trust, and managing tax implications, you can ensure that your assets are distributed according to your wishes and that your business will continue to thrive after you pass away with a trusted person at the helm. Working with an attorney will help you develop a comprehensive estate plan and exit strategy from your business that meets your unique goals.