How to Plan a Smooth Business Succession
Whether you are an employee, solo entrepreneur, or the owner of a business, estate planning and business succession documents can protect you, your family and your business. Many times a business owner gives no thought to the legal side of a business after its formation. However, ensuring that proper legal documents are in place can allow the business to grow and thrive, even if you can no longer work.
The most basic document to have is a well drafted Power of Attorney, which can permit another person, called an Agent, to manage your business and financial affairs if you are incapacitated due to injury or illness. Your Agent can represent you regarding benefits, compensation, or other employment-related issues. It is possible for the Power of Attorney to be broad, covering all personal and business financial matters, or to be a limited one for business purposes only. It is possible to have multiple agents who handle different things; one could handle your personal finances and another your business affairs. A Power of Attorney can allow your family to continue operating the business or to permit a seamless transition in the sale of the business if you become temporarily incapacitated. Even if you feel you have no business interests for which a Power of Attorney would be useful, it is still wise from a personal perspective to have this document in place.
If you are in business with another person, a Buy-Sell Agreement is a vital component of smoothly operating a business with partners. A Buy-Sell Agreement is used when property is transferred with your partners (due to divorce, death, etc.). The Agreement can establish the parameters for how ownership interests in the company are sold, pledged, or gifted away. A solid Buy-Sell Agreement can prevent shares of a company from being distributed to the other spouse during a divorce; it can prevent a creditor from attaching to the ownership interests; it can prevent the ownership interest from being passed on to children or gifted to others. It can ensure that you remain in business with only the persons you want to be in business with.
Also consider life insurance, which can allow your partners to have immediate liquid funds available to pay your estate for the value of your ownership interests. This allows your business to continue after your death without delays. Upon your death, your partners may be compelled under the terms of the Buy-Sell Agreement to buy your ownership interests from your estate. Having proceeds from a life insurance policy can create an infusion of funds sufficient to make the purchase, resulting in cash to your family and complete ownership interest to your business partners. It can also be a valuable protection for your family who, depending upon the value of your estate and business, may face significant cash flow problems and/or taxes as a result of your death and may need liquid resources very soon after your death.
Similarly, your Last Will & Testament should permit your Executor to continue the operations of your business during the period immediately following your death. If you are the sole owner of the business and die unexpectedly, the person you name in your Will as Executor can petition the Court to be appointed immediately so as to permit the continued operation of the business, pending its sale or dissolution. The Power of Attorney that you have so wisely put in place to assist your business partners during lifetime will terminate immediately upon death, and your nominated Executor will be the person who can, upon securing permission from the Court, manage your business. Inclusion in your Last Will and Testament of provisions permitting the operation of a business is important to permit this to happen.
Whether you have significant business interests, or you’re just starting out, getting proper estate planning documents in place is vital to your family and to your business’ continuity. Work with your attorney to ensure that you, your family and your business are protected.