By: Ronald A. Fatoullah, Esq. and Elizabeth Forspan, Esq.
Owners of successful small businesses generally want them to continue to succeed regardless of who controls the business, yet they are often behind the eight ball when it comes to succession planning in the businesses they have put so much time and energy into building. The following are some of the key issues that business owners must consider:
Estate Planning. Too often, small business owners do not have updated estate plans which outline to whom they would like their shares in the business to pass. This can create a huge headache for both the surviving partners/co-owners as well as the family members of the deceased partner/co-owner, who may be ill-equipped at meaningfully participating and/or running a business. Small business owners must have an updated estate plan that considers these issues. They should review their estate plans at least once every few years and as life circumstances change. Moreover, business owners must review their estate plans each and every time there is a change in tax laws.
2. Buy-Sell Agreement and Life Insurance. Many partnerships have (and those that don't must consider) a buy-sell agreement, which dictates what will happen if a partner should die during the course of the partnership. The buy-sell agreement may require the remaining partners to purchase the deceased partner's share from his or her family. The death of the partner, in this case, will be the triggering event. But how will the remaining partners pay for the buy-out? Business owners should consider a life insurance policy on each of the partners. In the event one partner dies unexpectedly, the remaining partners will be able to purchase the deceased partner's share and continue operating the business without having to get involved with the deceased partner's wife, children or other heirs. The authors have assisted business owners in preparing buy-sell agreements, which the authors believe is critical to the continuation of a business should the unexpected occur.
3. Key Person Insurance. Also referred to as "key man insurance," this life insurance is critical in many businesses where the contributions and roles of one or more of the partner's are essential to the continuation of the business. Oftentimes, one or more of the partners will have an active and important role in the company. In the unfortunate event that partner were to pass away, the survival of the entire business could be threatened if, for example, the other partners need to take time away from their typical roles within the business in order to take care of the activities of the deceased partner. Another issue that can arise when a crucial partner dies is that clients/customers may threaten to leave the business and the remaining partners will be forced to hire a very high-paid replacement, which can threaten the financial stability of the business. By preparing for this event through the purchase of key person insurance, the remaining partners can ensure the continuation of the business they worked so hard to build.
4. Management versus Ownership. A solid succession plan should not only consider ownership of the business in the event one or more owner dies or when the business is handed down to the next generation, it must also consider management of the business. The succession plan must ensure that there is someone (or a team) who can handle the day-to-day activities of the business, which include operations, administration, finances, etc. The person, or team, that is chosen to manage the business will be crucial to the successful continuation of the business.
5. Additional Considerations in a Family-Owned Business. Owners of family-owned-and-run business must consider all the issues mentioned above; however, they must also consider a host of other issues that may arise: (a) Ensuring that the business makes it to the next generation where the second generation lacks the skills and commitment of the prior generation; (b) Ensuring that the next generation provides for a comfortable retirement for those in the preceding generation; (c) Navigating the choppy waters of inter-family disputes where a greater share (or all of the business) may be left to one or more child who currently works in the business and not to other children who previously did not have much to do with the business.
It's important that owners of small businesses consult with an attorney who has experience in assisting businesses with preparing for the future of their practices so that the issues described above do not create unnecessary stumbling blocks which may threaten the survival of the business.
Ronald A. Fatoullah, Esq. is the principal of Ronald Fatoullah & Associates, a law firm that exclusively concentrates in elder law, special needs planning, estate planning, Medicaid planning, guardianships, estate administration, trusts, wills, and real estate. Elizabeth Forspan, Esq. is the managing attorney at the firm. The law firm can be reached at 718-261-1700, 516-466-4422, or toll free at 1-877-ELDER-LAW or 1-877-ESTATES.
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