Importance of Estate Planning for Entrepreneurs & Small Business
Just as each of us should make plans for the transfer of our personal assets to our heirs, the small business owners among us should plan for the disposition of their businesses. Your small business needs an estate plan, just as you do.
The estate planning attorneys at Brady Cobin Law Group, PLLC, can help. We have more than 35 years of experience helping people throughout North Carolina plan for the future and for the futures of their small businesses.
Schedule a consultation today with a knowledgeable Raleigh estate planning attorney.
Why Business Estate Planning Is Important
A small business likely has assets and debts. The business may own real estate and stock. It may have obligations to employees such as retirement funds.
If a small business owner dies without legal documentation as to what should happen to the business afterward, the uncertainty about its future can cause confusion and be harmful to the business. The same can occur if the small business owner becomes incapacitated and there’s no one legally authorized to make certain decisions.
A small business tied up in probate court, especially if the deceased owner’s heirs are fighting over the estate, can grind to a halt and fail. Probate, the legal process through which a deceased person’s debts are paid and assets are distributed to the proper beneficiaries, can be lengthy and costly if the deceased has left no plans or instructions.
Without a will or similar estate planning documents that address the disposition of the deceased’s business, it becomes another asset of the intestate estate in probate. Day-to-day business may go on for a while, but eventually, there will be no one who can act in the business’s name to sign a lease, contract with vendors, or borrow money to expand. The better alternative is to have a legally documented plan in place directing the disposition of the small business.
5 Elements of an Estate Plan for Small Business Owners
Estate planning is about transitions. For a small business owner, it is about how the business will pass to new ownership or wind down when the owner’s life comes to an end. If a business is more than a sole proprietorship, there are likely people who are counting on it to survive its current owner. As a small business owner, you do your business and your heirs a big favor by preparing for the orderly transition of the business when you are no longer there to run in it.
Here are five legal documents our estate planning attorneys would expect to discuss with a small business owner:
- Power of Attorney. A durable financial power of attorney authorizes someone else to make decisions on your behalf. The document outlines powers assigned and when they can be exercised. Someone should be entrusted with power of attorney regarding business needs should you become incapacitated by illness or injury. A financial power of attorney is meant primarily to ensure there is no gap in oversight of business operations if something unforeseen happens to you.
- A Living Trust. Trusts are established to hold and manage assets for a beneficiary or beneficiaries. Assets held in a trust are administered by a trustee and pass to beneficiaries in private, without the need for probate, a public process. Trusts allow assets to transfer faster and can provide tax advantages, as well. If you have selected a successor owner for your business and the business’s assets are held in a trust, you can ensure operations go on without interruption.
- A Succession Plan. Put in writing what you want to happen to your business, whether one person will assume ownership, multiple people will, or you want the business to be sold. If you pass ownership to a single person, such as a family member, you might require a payment to others in the family. If the business is to go to a partner, an employee, or someone else, a succession plan says so and sets the terms of purchase.
- Buy-Sell Agreement. You may consider writing business bylaws that allow business partners to buy the deceased partner’s share of the business in case of death or disability. The agreement would establish how the value of the business and the vacated ownership interest will be determined and how payment to your estate will be made.
- A Will. A will dictates how the assets of your estate will be distributed. All adults should have a will. If you own a small business, the business is part of your estate and will transfer according to your will, which should align with applicable documents as outlined above. If you sell your business, the proceeds become a part of your estate and from there are transferred according to your instructions. For example, a brother who co-founded and retired from the business may be promised proceeds from its sale should you die prior to him. Without a will, your estate is distributed according to state law, which in North Carolina divides your estate among your spouse and children, and absent them, parents, then siblings. If you die without a will, it is easier for purported heirs to challenge the division of your assets and tie up your estate including your business in litigation.
With estate planning in place, you have your wishes clearly spelled out, signed, and witnessed. Courts will rarely reverse the expressed wishes of the deceased without strong evidence of lack of capacity or undue influence at the time of the documents’ execution.
Contact an Estate Planning Attorney for Small Business
Estate planning for a small business should be part of your business’s long-range plan. It helps prepare the business for the future and helps prevent uncertainty about leadership and direction.
Meet with an experienced estate planning attorney with Brady Cobin Law Group in Raleigh, N.C., to review the strategies and documents that will protect your small business. We have advised a wide range of business owners across North Carolina, and we understand the unique needs and challenges small business owners face. Contact us today.