Dear Professor Bruce: I co-own a small business with a buddy of mine. What do we need to do in terms of estate planning in order to protect our business should something happen to one of us?
Small business estate planning is just as important as planning for your own personal finances. Depending on the structure of your company, what you need to have in place varies. Since your business has multiple owners, your needs are different from that of a sole-proprietor. In your case, you will need a Buy-Sell Agreement.
“Figuring out a succession plan for your business is absolutely essential, because people’s lives are always changing. No matter what happens–whether a co-owner goes through a divorce, dies, or just wants out, planning ahead will help ensure that the business stays intact. Things like this can really rip apart a business–and create unwanted legal costs–if you haven’t planned ahead,” adds Rocket Lawyer Founder and Executive Chairman, Charley Moore.
A Buy-Sell Agreement, sometimes referred to as a ‘business prenup’ or ‘business Will’, has many functions. The agreement can let your co-owners purchase your shares of the business. Alternatively, these agreements can designate an heir, so that a capable child or designated successor can inherit your part of the company. In this case, all the owners must mutually agree on that heir. You can also set up provisions for what happens if a co-owner simply wants out of your business.
Ownership transfers are complicated and potentially costly processes, but a Buy-Sell agreement can help actually lower the taxes on estate transfer. You and your co-owners can also set asides portions of your life insurance policy to provide the liquid cash necessary to help your deal with estate taxes and other costs associated with this type of asset transfer. Consider their needs when creating your life insurance policy or when creating your estate plan, so that the transfer of assets is a gift, not a burden.
For further information, please visit www.rocketlawyer.com
E-mail questions to Bruce@Smallbusinessprofessor.com.