Business Loans

Who Should Inherit My Business?

Even though it’s inevitable, most people have a hard time thinking about and planning for their own death. Without the proper provisions in place, family members are often left with a mess of paperwork and legal issues to sort through when a loved one passes. This is only compounded when the loved one was a business owner who didn’t answer the critical question, “Who should inherit my business?” Transferring ownership of a business posthumously is a complicated issue with many potential implications for the business and the beneficiaries. There are many elements to think about before deciding how you’d like your business handled in the event of your death.

Is Family Best?

In most states, your business is considered part of your estate. If you were to die without making specific plans for your business, it would likely be divided among those listed in your will. In most cases, this means your family will inherit your business. But, is this the best outcome for your business? If your family members were already an active and trusted part of your business team, then it makes sense for them to take over ownership of the business. However, if your children are very young or your family members have never had any interest in joining you in your business, it might not be to the best advantage of the business or your family to transfer ownership that way.

Of course, if your family is not interested in continuing the business, they can opt to sell it and divide the profits. Selling the company is also an option if there are disagreements between family members regarding how the business should continue running. And, if you’d like your family members to own the business, but realize they have no clue how to run it, you can work with a lawyer to stipulate a “non-voting” ownership, leaving the actual hands-on work to existing partners and employees.

Partnership Issues

If you own your business together with another person, there are special issues to plan for in the event of your death. Though your partners chose to do business with you, they may not wish to do business with your beneficiaries when you pass.

One way to prevent complications if a partner dies is to work with a business lawyer to determine how you’d like things handled in this situation. For example, you can create a buy/sell agreement, which is like a contract that gives the surviving partners the option to acquire the deceased partner’s ownership portion from his estate. This buy-out could also be mandatory, if that’s what your and your partners agree would be best. A restriction agreement is another possibility that outlines how and to whom ownership shares can be passed down. Restriction agreements are generally used to avoid an ex-spouse from inheriting the business.

Other Options

Are you wondering, who should inherit my business if I don’t have partners and don’t want it to go to my family? There are some other routes that may work for you. For example, you can purchase “key man” insurance, which will give your business a sum of cash if you die, so that the business can purchase your ownership shares or hire your replacement. An employee stock ownership plan is another choice that essentially puts your ownership shares into a prepared trust for all or specific employees, so they inherit the business when you die.

Keep in mind that there are heavy estate taxes (sometimes in excess of 40 percent) on the people who inherit your business, unless it is your spouse. You will want to work with a seasoned tax attorney to ensure you are using the proper strategies to mitigate this burden for your beneficiaries.

Getting the legal documentation in place to secure the transfer of your business’ ownership in the event of your death is an important task that small business owners should not ignore. Working with an estate attorney can be costly, but it is definitely worth it to save your family and your business unnecessary headaches and tax bills.

Just starting out and don’t have the cash to incur this expense without a gap in cash flow? Consider a small business loan or line of credit to help get this important paperwork in place so you know your business and your family will be taken care of when you pass.

 

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