When my clients talk about starting a small business, they see that business as a means to several ends.
If profitable, it will give them the ability to increase their income and support the lifestyle they want. It also allows them a freedom they just can’t find anywhere else – to be their own boss and call their own shots.
But all of this pales in comparison to one of the biggest dreams that small business supports, and that is the ability to build a legacy that they can leave to their children and beyond.
Now, that’s the romantic side of building a family business. But for those grand visions to actually happen, we need to take a look at the practical side of small business planning.
First and foremost, you’ll want to designate an heir to your business. Depending on your circumstances, this can be simple or not so simple at all. If you have multiple heirs, you can divide your business equally among them, but only if you’re sure they can run the business effectively together. If not, you’ll have to consider how to ensure all your children benefit from the family business without tearing the business apart in the process.
If there are no family members to designate as heirs, you’ll need to look at other options like your most trusted employees, other businesses or even charities. In any event, these can be complicated decisions and require a considerable amount of planning, discussion and tact.
If your business is a partnership with someone outside the family, you’ll want to ensure that your heirs can inherit your half of the business and have the ability to buy out your partner if that is the agreement you’ve set up. This can typically be done with proceeds from a life insurance policy, however you may alternatively want to designate your partners as the beneficiary on your policy, allowing them to buy out your shares from family members.
In either scenario, you’ll want to create a Buy-Sell agreement that outlines the process for distributing interests in the business when one of the partners becomes incapacitated or passes away. The agreement stipulates the sale price of the share, whether you want the heirs to sell the portion, whether you do not want an individual to buy out your share, the share of each partner and other related options.
And, as with any kind of estate, there are usually taxes to be paid when someone dies. A good estate planning attorney can help you minimize those taxes to ensure that the majority of your interest in the business passes to your heirs or your partners tax-free.