Estate Planning For The Small Business Owner – Why It Matters.

Do you own your own small business? Do you have a plan in place if you die while you are still running it? Because none of us know when life will change, it is important to put in place a formal estate plan as soon as possible. If you don’t, you run the risk of leaving your family, employees, and any other dependants without clear instructions, potentially destroying the business you worked so hard to build.

Think about how many people depend on your business to survive – your family’s wealth is most likely tied up in your business and your employees depend on it for their monthly salaries and livelihoods. In order to sustain these lives in the case of your death, your business either needs to transition to the next generation of leadership or be sold to a new owner at a fair price, possibly providing some income for your family and allowing your employees to continue to work. Both these scenarios require careful planning and execution through an estate plan.

When putting your plan together, it’s important to establish whether your business has the potential to be multi-generational (to continue after your death) or if it is marketable after your death, or even if it will not continue after you’ve gone. This ‘status’ will affect your estate plan. For an owner-dependant business, the owner will draw income and retirement funding from the business to provide for their family during and after their life. In this case, it is important to consider where your family will get their income after your business ceases to exist and to minimise financial liability (through the proper insurances) while the business is running so that your dependants are not left with massive debt.

If you run a small to medium sized business, you may want to pass it on after you’ve died or allow your dependants to sell it. It takes a well-conceived estate plan, with special consideration for a business owner’s intent, to realise the business as either an ongoing concern or as a source of capital for a surviving family.

A proper estate plan should:

  • Ensure that your wishes are honoured after your death
  • Communicate your expectations precisely to your family, dependants, and financial adviser
  • Ensure a continuous stream of income for your family, if required
  • Provide the capital needed to keep the business operating, if required
  • Minimise estate taxes and other costs

Here are 5 elements you should consider when putting together an estate plan:

  • Your will. Your estate plan should include a copy of your will. This document allows you to specify how you want your assets transferred after you die as well as nominate an executor to handle your affairs. The executor should have access to all policies and passwords on your death to allow the transfer of assets to progress smoothly.
  • Power of attorney for the business. What will happen to your payroll and daily administrative tasks if you are not there to fulfil them? Consider nominating (in writing) a responsible individual to carry out your business affairs (this can also be useful if you are incapacitated and unable to work).
  • Buy-Sell Agreement. If you are in a partnership and your business has more than one owner, a buy-sell agreement is a non-negotiable. This document outlines your plan for the business’ future in the case of the death or incapacitation of one of the owners. It includes share sale prices and directives on what to do with each owner’s share. Without this document, your dependants might end up running your business when they have no interest in doing so or when they could do better if they had the opportunity to sell it.
  • Life insurance. Not only will life insurance protect your family in the case of your death, it can be useful for your business partners as well. If they are named as beneficiaries, the pay-out can help them buy out a deceased partner’s shares. And, as a business expense, the business can pay for it.
  • Succession plan. Are you the sole owner of your business? Spend time thinking about what would happen to the business if you die and you want to pass it on. If you have a successor in mind, you need to prepare them for their new role long before they step into it. This is where a succession plan comes into play, outlining the mentorship and development of your successor.

With the above in mind, every business owner’s situation is different and will require a unique estate plan. It is important to speak to a professional about your business strategy and financial concerns so that you can put in place the most appropriate plans for your business and your dependants.

Don’t have a financial adviser to help you? We can recommend an expert. Or do you need help managing and reviewing your business’s finances on a day to day basis? We can help!  Contact us for all your accounting and tax requirements and rest assured that all your business affairs will be in proper order, no matter what the future holds.

* Image Source: