Why Having A Will May Cost You Your Business
Your business is likely the most valuable asset you own - it’s not only your source of income, but it is the product of your hard work and perhaps even the livelihood of others. As a business owner, it is essential that you plan for the fate of your business should you become incapacitated or pass away unexpectedly. This estate plan should be comprehensive, and it should be carefully crafted to create the exact result you intend. Without an estate plan, or if you simply have a will transferring your business to a partner or family member, the results will be messy and may even result in the collapse of the business.
Transferring a Business Using a Will
If you are the sole business owner, your business (and everything it owns) will be a part of your estate. That means, when you pass away the business and its assets will pass to the beneficiaries you designate in your will. Your will specifies how you want assets transferred and to whom, and it will allow you to identify a personal representative to administer your estate.
If you choose to transfer your business under your will, your estate must first go through the probate process. This process is a public court proceeding that can take anywhere from six to eighteen months. If a business is a part of your estate, it is likely that the probate process will take more time than if the estate consisted of only personal assets.
Putting a business through probate can be a nightmare. First, there is the time factor. During the probate period, the business will essentially have to be put on hold while the courts determine whether there are any outstanding debts to be paid, as well as how and to whom the business should transfer. Secondly, the cost of probate can be prohibitive. The high costs of legal fees as well as court costs may end up driving your business into bankruptcy pretty much immediately. Thirdly, because probate is public, all information about your business- its value, assets, and debts- will become part of the public record.
However, there are other ways of transferring your business and its assets that can keep the business out of probate and protect the business from bankruptcy during this transition.
Creating a succession plan is the best way to protect your family, your business, and your employees in the event that you become incapacitated or pass away unexpectedly.
When creating a succession plan, you will need to look at the structure of your business and decide whether you want your business to pass to the next generation, be sold at a fair price, or dissolve once you are no longer able to run it. If you have business partners, will they want to buy out your share of the business once you are no longer involved? Or do you want someone in your family to take your place?
If the business is dependent on your skills and there is no one to take over the business, your succession plan may just be to settle all valid debts, pay fair severance to all employees, and wind down the business gracefully. Doing so, however, requires careful planning. You will need to document your intent to terminate the business upon your death.
If you want the business to pass to an heir and you have no other business partners, you will need to have your succession plan written down and fully detailed. Discuss the plan with the designated successor ahead of time to ensure that they are willing and able to take on the business. If you would rather your family be able to sell the business after you pass, do research ahead of time so that your family will be prepared for the process and know a fair price for selling the business.
Regardless of whether you want your business to wind down or to continue thriving, it will be essential that you provide all information that may be necessary for your designated successor to take control of your business during the transition. This means providing this trusted individual with account names and passwords for all bank accounts, email accounts, social networking sites, and file storage sites. It is a good idea to keep a notebook with all account information, locations of assets, and passwords in a secured place where your designated successor knows how to access it.
If your business is co-owned with other individuals, it is important that you enter into a Buy-Sell Agreement that plans for the retirement, incapacity, or death of any of the business owners. In a Buy-Sell Agreement, co-owners agree on a plan for the business’s future, including a sale price for each owner’s share of the business and any restrictions on what should not happen with the business. Without a Buy-Sell Agreement, your share of the business will pass to your heirs as part of your estate, and your loved ones could end up co-owning a business that they don’t want. This may lead to disharmony within the business or your family member selling your share for less than a fair price.
If you have a Buy-Sell Agreement with your co-owners, it is likely that each co-owner will want to take out a life insurance policy on each of the other owners. This provides surviving co-owners with the cash to buy out your share of the business: fulfilling the Buy-Sell Agreement and providing your family with supplemental support.
If your family relies upon your business income, it may also be prudent for your family to take out a life insurance policy on you. This allows your family some time to adjust to life without your business income.
Another form of life insurance that may save your business is called “Key Man Insurance.” This is a policy that a company can take out on the owner or other key employee of a business without whom the business would fail. The pay out from Key Man Insurance gives the business time to either hire a replacement or wind down the business gracefully. Key Man Insurance is designed to prevent a company from having to immediately file for bankruptcy on the death of an owner.
Consider Setting Up a Trust
One way to avoid probate is to place assets, such as a business ownership interest, into a trust. There are different ways to structure a trust based on what is appropriate for your business. Placing assets into a trust can keep the business’s affairs private, reduce legal fees, and provide some protection from creditors.
A revocable living trust is a flexible form of asset protection because it can be amended during your lifetime. While revocable trusts do not provide the same protection from creditors as an irrevocable trust, there are many benefits to keeping a trust flexible.
Because revocable trusts allow the grantor to exercise a certain amount of control over how assets are distributed and used, a trust is a useful tool to accommodate more complex transfers. For example, if you want to leave the business to one of your children, but you want your other children to benefit from the proceeds as well, a trust is a good way to achieve this.
Ask a St. Petersburg Business Succession Planning Attorney for Assistance
When planning for your business’s future, whether it is a new business or an established business, there will be a lot to consider. Consult with an experienced Florida business attorney to determine which is the best plan for you and your family. To get started, contact Kira Doyle Law’s St. Petersburg office at (727) 537-6818 to do a full analysis.