What Happens To Your Business When You Don’t Plan for the Future?
Running a successful business is no easy task, and it requires careful planning. But what happens to your business if you don’t plan ahead? This blog post will discuss the importance of planning for the future and how it can make or break your business.
It’s crucial that you plan what you want to do with your business in the short and long term. A clear vision of where you want your company to be in five years—or even two or three years—is essential to growing a successful business. Without a plan, it’s like trying to hit a target without knowing what it looks like—you won’t know if you’re on track and could waste valuable resources along the way. But what about your “Exit Plan”? Have you thought about what you want to happen to your business if you pass away?
Well, here’s what happens
When a business owner dies, what happens next depends on the type of business, whether there is a business continuity plan or another type of succession plan, and whether there is a will. In most cases, without a will, the remaining assets of ownership are distributed according to state or provincial law through the probate system.
If a business is a sole proprietorship, it ceases to operate upon the owner’s death. The business debt and assets become part of the personal holdings, and the estate is distributed according to the terms of the will.
If a business is a corporation or an S corporation, the estate becomes the business’s new owner. Unlike sole proprietorships, corporations or S corporations do not automatically cease to exist when a business owner dies; instead, the estate becomes the new owner of the business and in situations where heirs or beneficiaries inherit the business equally, their decisions about the future of the business may require separate legal transactions, especially if they disagree about their roles or the business’s future or if one wishes to buy out the others. It is important to specifically address your business in your will – who is to take over, what you want to happen to it, and any other important items.
If a business is a limited liability corporation, it must have an operating agreement that includes what happens in the event of a death. If this agreement allows the LLC to continue after the death of an owner, the surviving owners, if any, can vote to buy out the heirs’ shares and allow continued sharing in profits and losses (financial interests) but not in managing or voting (managerial interests), or add the heir as an owner with both financial and managerial authority.
LIMITED LIABILITY CORPORATIONS
In the event of the death of a single member LLC, the operating agreement determines what happens as well. It will cease to exist when the owner dies unless there are provisions for the LLC to live on after its owner. If you are the sole heir and there are no other surviving owners, you can generally choose to continue running the business or close it altogether, according to state law.
If a business is a partnership, limited partnership, or limited liability partnership, what happens depends upon the terms of the partnership agreement. Generally, in a formal partnership, the shares transfer to the estate. The heirs continue to share in the partnership’s financial interests but cannot participate in managerial interests. The estate may owe the business money if the partnership’s debts are higher than its assets. If there is no formal partnership agreement, the death legally dissolves the partnership, and all business activity ceases except for the steps necessary to close the partnership.
Honoring the business legacy
For someone who owns their own business, their professional identity is often significantly intertwined with their personal identity. For that reason, any obituary you publish should include information and anecdotes about the person’s business career path and legacy—especially if you will continue the business.
Because of the personal nature of the relationships in family-owned businesses, death can be disruptive and destabilizing to the employees. They will be stunned and sad, as you are, and worried about their jobs and professional futures, especially if the death was unexpected.
THE IMPORTANCE OF PLANNING FOR WHAT HAPPENS TO THE BUSINESS UPON THE DEATH OF THE OWNER
It is essential for business owners to create a buy-sell agreement that will outline what should be done in case of an owner’s death. Without a buy-sell agreement, the personal trauma that a widow, widower, or children experience dealing with their loss can make the process much more taxing. Conversations before the death of a business owner can allow for open dialogue and communication with all members of the business. It is also important to remember the role life insurance can play if the business owner or co-owner dies. Instead of requiring the cash to come out of the business to buy out shares, typical death clauses involve purchasing life insurance on behalf of all owners. Upon their death, the life insurance payout settles the estate.
- Identify successors
You must identify who you want to lead your company when you’re no longer around. Consider whether you want to sell or transfer the company to a family member or sell to a third party. Take the time to make a firm decision and then communicate your goals to family members, business partners, and future successors.
- Sign it in ink
Make sure your wishes are legally documented. You should include your succession plan in an agreement signed by all shareholders or partners. If you are the sole owner of your company, there are other alternatives, such as signing an option agreement funded by a life insurance policy, which can grant a designated person the right to buy a business on preset terms if you die.
- Consider Key Person Insurance
Death does not stop the financial cycle. Loan documents may include “due on death” clauses. Key person insurance operates like a life insurance policy for a business owner by providing the business with funds to service its debt or to provide the business with liquidity to keep the business running.
- Anticipate tax issues
When your business changes hands, there will always be tax implications you will want to minimize. If the business is sold upon your death, you should consider that there may be taxes to mitigate. Gift taxes could enter the equation if the business is transferred to a family member. Anticipate these tax issues now and strategically plan to lessen the burden for your successors.
- Get personal affairs in order
Most of a business owner’s personal net worth is likely tied up in their company, so it’s important to ensure your personal and business obligations are coordinated. Now is the time if you haven’t delved into your personal will.
- Act as if you were selling
You should keep your business primed for a smooth transition. The best way to achieve this is to run your business as if you were going to sell now. Keep all of your business contracts, leases, and other agreements current and readily available to those who might need to access them, and make sure you’re not the only person in your company who understands its critical components.
- Partner with professionals
Planning your business estate is an intricate process you don’t want to derail through poor planning. Work with experts such as lawyers, accountants, and financial planners to ensure all details are cemented and your legacy — no matter what’s in store — can last generations.
- Financial Considerations
Have up-to-date, accurate financial records. Your Balance Sheet will show exactly how much you have in assets and liabilities. This is important for whoever will deal with the business – can it support its commitments? Does your business have enough cash reserved to pay your team? How long would you want your team to be paid? How much money is that? Have you accepted money from clients for “work in progress” – will that work be fulfilled, or do you need to provide refunds? Who can make payments in your company? If you are the only one who can pay a bill, that’s a problem. Ensure that your accountant, right-hand person, or a designated individual can keep paying the company’s bills.
This blog is not exhaustive – there are many considerations when taking care of this. Pull together your team (lawyer, accountant, financial planner) to ensure that you have everything in place so your family has one less worry. If you need support with this, feel free to reach out for a conversation.