Estate Planning for Small Business Owners

Among the many issues facing small business owners, estate planning is one that often falls last on the list. This should not be the case. A well thought out estate plan and buy/sell agreement can help mitigate business disputes, retain the value of the business and provide a proper path for a business to continue after an owner’s death or incapacity.

Who is in control of the company? This question often comes up when an owner dies or becomes incapacitated. Ultimately, control lies with whoever controls the owner’s shares of stock or membership units in the company (collectively, the “ownership interests”). Whoever controls an owner’s ownership interests in the company will be able to vote the ownership interests to determine who will act as the company’s directors, officers or managers and will be able to approve certain transactions, such as the sale of the business.

At a minimum, an owner should have a valid financial power of attorney. In the event an owner is incapacitated, the owner’s agent, as set forth in his or her financial power of attorney, will be able to vote and control the owner’s ownership interests. If an owner does not have a valid power of attorney in place, someone, generally a member of the owner’s family, will have to petition the court to become the owner’s guardian. The guardianship process is long, public, and costly and can delay a family’s ability to control the incapacitated owner’s ownership interests.

Regardless of whether an owner has a will or not, the transfer of his or her ownership interests will be subject to the probate process. The probate process is a court proceeding dictated by state law whereby a deceased individual’s personal representative disburses his or her assets subject to certain rules set forth in the state statues. The probate process is a public proceeding, and anyone can get access to documents that are part of the probate proceeding, including potentially sensitive business information.

To avoid the probate process, owners can utilize a revocable trust. A revocable trust is an entity that the owner controls as the trustee during his or her lifetime. When an owner dies or becomes incapacitated, the successor trustee (whom the owner has chosen), will manage, control and distribute the owner’s shares or ownership interests pursuant to the rules the owner set forth in the trust. The revocable trust provides a private and efficient means to administer an owner’s ownership interests.

In situations where a business has multiple owners, the owners should have a buy/sell agreement that controls what will happen to an owner’s ownership interests if he or she becomes incapacitated or dies. A buy/sell agreement typically provides either that an owner can pass his or her ownership interests on to his or her family or that the other owners have an option to purchase the incapacitated or deceased owner’s ownership interests. If the buy/sell agreement provides the other owners with the ability to purchase the deceased or incapacitated owner’s ownership interests, the agreement should be clear on how the purchase price and payment terms are determined.

The following are some practical actions that a small business owner can take to ensure that his or her business can continue upon his or her death or incapacity:

1. Access to Bank Accounts – Ensure that a key employee or trusted family member can access the business’s bank account and can pay the business’s bills when they come due.

2. Financial Records – Ensure that a key employee or trusted family member knows how to access the company’s financial records to ensure that bills are paid and tax returns are prepared on time.

3. List of Important Contacts – Prepare a list of important contacts that includes his or her accountant, attorney, banker and insurance provider.

4. Passwords and Online Access – Prepare and update a list of usernames and passwords for all of the business’s online accounts. Of particular importance are the business’s main email account and online portals for paying payroll and sales taxes.

5. Estate Planning Documents – At a minimum have a valid power of attorney and will in place. If the owner values privacy and efficiency, he or she should consider holding his or her ownership interests or shares in a revocable trust.

Small business owners should review their estate plan on a yearly basis to ensure that it is up to date, they have named the proper individuals in key roles and that the plan makes sense given their current situation. For more information on Estate Planning, regardless if you own a small business, please contact one of our Estate Planning Attorneys.

Written By:
Attorney James M. Ledvina