by Michael J. McKitrick
Yes, small businesses need estate plans. Business estate plans determine what happens if the owner can no longer operate the business due to death or disability. A plan must be in place to address either potentially devastating situation.
Businesses with multiple owners commonly use Buy/Sell Agreements for such a plan. These provisions can be inserted into the Operating Agreement if the business is a limited liability Company (LLC) or can be provided in a separate agreement if the business is a corporation or partnership. There are two general forms used:
- Buy/Sell Provisions: Remaining owners (whether shareholders, members, or partners) buy the deceased owner’s interest from the estate. A life insurance policy can provide funds for the purchase.
- Redemption Agreement: The company buys the deceased owner’s interests from the estate. The remaining owners own the company. Proceeds from the sale go to the estate. This arrangement can also be funded by a life insurance policy.
Because of the tax and legal considerations involved, it is critical that these plans be thought out and planned in advance with the advice and input of the business’ attorney, accountant, and insurance professional.
If no agreement exists, the remaining owners must deal with the deceased owner’s estate, possibly controlled by the spouse, children, or other persons not involved in the business. This can be very disruptive. The business may have to be sold or liquidated to the detriment to all concerned. The value of the business is not passed on to the estate. The remaining owners must deal with a hostile party and potential litigation which could destroy the business.
The loss of an owner can also cause a vacuum in the management of the company. The business estate plan should include insurance to provide funds to recruit a replacement for the deceased manager owner, to continue to operate the business, or otherwise to defray expenses caused by the untimely occurrence.
A business with one owner and no other shareholders involved and no plan presents a great risk. Without a plan, the estate has to operate or sell the business under unfavorable circumstances.
A business succession plan can address the gradual succession in ownership and provide for business succession in the event of the owner’s death or disability. It can develop a family member or key employee to operate the business and identify employees who could continue to run the business while the ownership is being determined.
Alternatively, the owner may decide it is time to sell the business and devote his efforts to getting the business ready to sell.
Unfortunately, 75%-80% of businesses do not have succession plans. Typically, the owner is so concerned with the everyday demands of running the business that he does not develop an estate plan for the business or himself.
However, if no plan is in place, the business stands to lose much of the goodwill and value that the owner has generated through running the business over the years. It is critical that the owner devote some of that time and energy to ensure that an estate plan for the business is in place. Does your business have such a plan?
Michael J. McKitrick, a corporate law attorney with Danna McKitrick, P.C., has over 40 years of commercial litigation and transactional law experience. His practice encompasses business and transactional advice, commercial real estate matters, and regulatory and practice management guidance for health care professionals. Mike can be reached at 314.889.7122 or firstname.lastname@example.org