Get Ready to Conquer Your Company’s Estate Planning

Posted on August 3, 2013 in Planning & Advisors

From childhood, we’re taught to begin at the beginning. A-B-C-, 1-2-3. “Start at the beginning,” we’re told when we rush in breathless to tell an exciting story. Things have a beginning, a middle, and an end. Even the Bible begins with, “In the beginning . . . .” It makes beginning with the end in mind rather, well, counterintuitive.

But that’s how entrepreneurs need to think about their business. Not just “what will we do?” and “to whom will we sell?”, although that’s certainly important. Rather, the threshold question is “what’s in this business for me?” Its corollary: “what do I want to get out of it?” Without asking yourself these questions, all you have done is work yourself into a job with the most unforgiving, stingy taskmaster possible: yourself.

When you begin with the end in mind, you have a vision for your future. Like those “eulogy exercises” in personal development seminars. If someone were giving your eulogy, what would you want them to be able to say about you? So take that exercise and apply it to your business. Looking backwards, what do you want to be able to say about your business? Here are some ideas:

  • It provided you with a fantastic income to support your family while you were alive
  • You grew it to sell it to someone else so that you could retire early and spend more time with your family . . . or, maybe, traveling, or starting the next business
  • You planted a seed that your children could take over and grow for the next generation

Once you have become clear about your goal, then you can work backwards to put the building blocks in place to get there. Let’s look at each option in turn.

  1. Build to Keep
    Many entrepreneurs favor this “lone ranger” model. They own the business by themselves. If they do have any staff, they either outsource it (as in virtual staff or using consultants), or hire employees for the more basic, administrative tasks. There’s no career path within the company, no corporate ladder to climb. The focus of the business is to generate as much profit (and provide as much income to the owner) as possible during the lifetime of the owner. When the owner dies, the business closes. End of story, yes?
    Not quite.Solopreneur companies need to ensure that they minimize the risk of liability while the company (and the owner) is in existence. Your planning may involve setting up a corporation or limited liability company and obtaining adequate insurance. Also, you need to keep your family members in mind. They could get hit with a whopping estate tax bill upon your death (especially if you die suddenly), unless they can prove that the business has limited value without you. An estate attorney who has experience with these business issues can help you, the owner, document your intent to terminate the business upon your death or retirement.
  2. Build to Sell
    If you want to build to sell, you have a different set of management issues to consider. First, you have to structure the business so that it absolutely does not need you to function. This means you will need to spend time in the hiring and training of employees and/or creating saleable assets. In addition, you may well bring on additional owners to grow the business.In that case, you will want to include a business ownership agreement (whether, by name, a partnership, shareholders’, or operating agreement) in your succession plan. The ownership agreement should cover how, and under what circumstances, you sell your ownership interests to the other owners – as well as to third parties. The succession plan should also address putting insurance in place so that there are ready funds available should an owner die or become disabled. You will want to have complementary provisions in your Last Will and Testament. Imagine a situation where you got hit by a bus. The company is doing well but is poised for m-a-h-o-r financial growth. Your Will says that everything you own goes to your spouse. Your ownership agreement says that upon your death, the company buys back your ownership and your estate gets the proceeds. Your spouse wants to hang onto the ownership to enjoy the crest of wave that’s about to hit. Your business partners don’t want to be in business with your spouse. Do you see the potential for conflict?
  3. Build to Pass On
    If your goal for building a business is to make sure that little Janey and little Johnny can carry on your great ideals into the next generation, think again. According to the Family Business Institute, only about 30% of family businesses survive into the second generation. Of those, only about 12% are still viable into the third generation, and only about 3% operate into the fourth generation or beyond. Building a legacy takes time and careful cultivation. And frankly, a lot of children would have preferred the legacy of your spending more quality time with them, than being saddled with “your” business to run.Family businesses are rife with tax and legal issues. Do you want to transfer the ownership of the business to your children over time? With they become actively involved in the business while you are still alive (and working)? Which legal form provides the most tax advantages? Like the build-to-sell model, do you have a solid ownership agreement in place?As the legacy of royal families attests, succession planning is rarely a smooth process. The eldest child may not be qualified to “rule.” What if Janey has ideal business leadership skills but Johnny would rather help AIDS victims in Africa? Should Johnny still get a piece of the pie (after all, the business is an asset of your estate)? What if they both want in but Johnny has the business sense and Janey has the nonsense? How do you choose? Many entrepreneurs find succession planning more difficult than managing the business.

Whatever your choice, you don’t have to puzzle through these issues alone. Legal, accounting, and insurance professionals are all available to help you identify the issues so that you can conquer your company’s estate planning!

To get the latest posts delivered right to your inbox, enter your email in the box below:

back to top