Estate planning for small businesses is essential in order for the business to survive after the death of the owner. It is important to make plans for your business to ensure its continued growth and success. To ensure that a business does not die along with the owner, there are certain strategies a business owner should consider.
Estate Tax
One benefit of planning your business estate is the ability to minimize the amount of estate taxes the business will need to pay. Estate tax, also known as death tax, normally ranges from 35% to 50% of the business assets and is due within 9 months after death. One IRS tax break that many heirs take advantage of to cover estate tax is Section 303. This allows your estate to redeem your stocks with a very small tax cost. In order to use this method, the stock value must be more than 35% of the estate. Section 303 is a one-time opportunity that can help cover estate taxes. Another option for business owners who do not want their business to be passed on is to document their intent to terminate the business upon their death. With this document, the business will not be transferred to heirs upon death and it will be dissolved. Paying estate tax will be avoided because tax cannot be paid on a company that no longer exists.
Most business assets are not liquid, meaning these assets cannot easily be converted into cash. As a result, paying off death tax often results in selling the business, which would effectively kill the company. Estate planning can prevent this from happening. In many cases, business owners purchase life insurance policy that would cover the estate tax. Doing this will also provide surviving owners an opportunity to continue the business.
Buy-Sell Agreement
Making a buy-sell agreement between shareholders or partners establishes a plan for the business in case one of the owners dies. A buy-sell agreement is a contract that establishes a sale price for the business and your share of the business. You can document what you will allow to happen to your business, for example, whether if your business partners are allowed to buy your shares, or if you want to block certain people from having a role in the business.
The document will also state if you want your heirs to sell your portion on the company. Since the business price was already established in the document, it will reduce potential confusion or conflict for your heirs.
Sole Proprietorship
A sole proprietorship is a type of business entity that is run by one owner with no legal distinction between the owner and the business. If you are a sole proprietor, it is even more important that you carefully plan out what will happen to your business after you pass away. One benefit as a sole proprietor is that personal assets can be used for business debts. If you do not take the necessary precautions to protect your business, it may be dissolved after your death.
Heirs to a Business
In a family run enterprise, the business owner will need to decide exactly how much each heir receives or if each heir gets an equal part. Inform your successors as soon as possible and prepare them to take over your business. In the case that an heir does not want to take over the business or you would like them to sell your business, do research and provide specific instructions on the sale process.
If a business owner dies without a plan, the successors are left with no direction as to how to maintain the business. Estate planning will help ease the transition process for the heirs of a company and provide directions for them to run the company in the way the business owner envisioned.