The American economy depends on small businesses. The Small Business Association defines a small business as an independent business with fewer than 1500 employees. Interestingly, 90% of these businesses have less than 20 employees.
Regardless of size, small business owners need well-constructed estate plans which protect the business if the owner becomes incapacitated. Additionally, every owner should discuss and establish succession plan documents. Businesses may be tied up in court for months or years without proper legal papers. Therefore, small business owners should meet with an experienced, estate planning attorney to discuss, write, and file these vital documents.
Estate Planning Documents
All estate plans contain similar, basic documents. Small business owners require personal estate plans and business estate plans. Some of these documents include:
- Wills – If in when you pass away, this document dictates what happens with your business and the assets
- Financial Power of Attorney – If you become incapacitated this person may sign checks and handle financial matters.
- Healthcare Directives – Appoint someone to make medical decisions for you if you are unable to do so.
- Trusts – If you want to create special provisions to, for example, distribute financial assets during the course of someone’s life, a trust is a very useful tool.
- Life and Disability Insurance – An estate planning attorney can provide guidance on this matter including purchasing appropriate levels of this insurance.
Business Succession Plans
Succession planning deals with the future of the business after you pass away. In other words, who will be in charge? Depending on the size and scope of the business this may be quite complicated. Of course, sometimes a business ceases to exist when the owner passes away. In that case, the will and trust documents determine asset distribution. However, if the small business continues, then a legally drafted succession plan becomes necessary. In this scenario, estate and financial plans must be carefully coordinated. The following explains some of the ways an attorney may assist you with this process:
- Buy-Sell Agreement- The Buy-Sell Agreement (BSA) is a contract which states what happens to a business when one of the owners passes away, retires, or becomes disabled. BSA’s may be structured in a variety of ways and require an experienced attorney’s expertise. It’s important to note, there may be funding constraints on these agreements. All financial issues must be considered when establishing this legally binding document.
- Tax efficiency planning- A solid succession plan considers the tax implications of transferring a business. An experienced estate planning attorney along with a financial advisor will guide you in these matters.
- Planning for short or long term disability- Your business must continue if you are disabled for any length of time. So, discuss this with your attorney as part of a “temporary” succession plan.
Succession Planning for E-Commerce Business
E-commerce presents a unique and unprecedented challenge for business succession planning. Unlike traditional brick and mortar businesses run by multiple managers and having multiple stakeholders, online and ecommerce businesses usually are primarily run by a single owner. This makes succession challenging to manage, as there needs to be planning ahead of time to select an individual to take the reins who not only has an interest in taking on the responsibility but also is qualified.
As these owner operated ecommerce businesses are often heavily labor intensive on a single person, it is harder to select a successor than it would be for a regular business operation. For example, startup businesses heavily reliant upon technical expertise and B2B partnerships can be cripled by poor succession planning, often causing them to close their doors despite years of previous success. It is vital therefore that e-commerce businesses set up a sound succession planning strategy to ensure the businesses continued success after the owner steps down.
Questions to Consider
A small business estate plan requires thought and planning. It helps if you know what you want before meeting with an attorney. However, the initial meeting provides the client and attorney an opportunity to communicate ideas and recommendations. The following questions offer a starting point for discussion.
What type of business do you own?
Are you the sole owner?
How many employees do you have?
Is this a family business?
Are you married? Do you have children?
Do you want your business to continue after your death?
Who do you want to run the business if you are unable to do so?
Do you already have a will, trust, financial power of attorney, or health directive?
Would you prefer to sell the business if you are unable to run it anymore?
Do you have any assets outside the business?
An experienced estate planning attorney will provide guidance and write all necessary legal documents to protect you and your business. Once the process is completed, discuss these papers with all affected parties.
Remember, when a small business owner passes away without necessary estate planning documents, the family and the business suffers. Sometimes, the tax implications cost your heirs a tremendous amount of money. Additionally, family members and business partners may spend countless hours, and financial resources in court. In fact, it may take years to settle the estate. So, contact an experienced estate planning lawyer and write your small business estate plan.