While an estate plan helps to protect your assets from taxes and creditors and allows you to control how your property will be distributed, a business succession plan can help you make sure that your business will be protected and management will be transferred to the individuals you choose after you retire, or upon your death.
Protecting your legacy
If you want to ensure that your family-owned business, and the legacy it will provide, will be passed down from one generation to the next, it is vital that you not only consider, but plan for the succession of your business. In order to accomplish this, you must create a proper business succession plan and put that plan in place as soon as you can.
The indisputable benefits of a business succession plan
Eventually, you will start contemplating your retirement from managing your family-owned business. You must realize, though, that retiring from your own business is not as simple as turning in your letter of resignation. Indeed, you cannot feel comfortable retiring until you know you have left your business, and your legacy, in capable hands. The reality is that most business owners do not have a succession plan in place. While most expect to pass their business on to their children or grandchildren, statistics indicate that less than 30% of small business owners actually have a workable succession plan in place.
Why you must have a succession plan
The ultimate objective of your succession plan should be the smooth transition of ownership of the business to the next generation. Without a smooth transfer of management, your business could be in jeopardy and may not survive your retirement in one piece. A well-thought out succession plan is the answer. The two most common issues that prevent family-owned businesses from surviving are inadequate tax planning and family disagreements. Fortunately, both of these issues can be handled with comprehensive business succession planning.
What you should include in your succession plan
Every business succession plan should address the following issues: ownership, management and taxes. A common misconception is that management and ownership of a business are the same thing, when in fact, they are very distinct concepts. While you can certainly transfer ownership of your business to all of your children, you may only want to name one of your children to take over management of the company. In reality, not all of your children will be interested in managing the business or even being active in its operation.
Planning for business taxes is critical
When you start planning the succession of your business, addressing tax liability should be a very important element of your plan. The objective is to reduce the amount of taxes your estate will incur as a result of your interest in the business. If planned properly, there are several business planning strategies that can be used to minimize tax consequences. For instance, many small businesses qualify for tax credits.
Ways to minimize taxes during the transfer of your business
There are different ways to accomplish the transfer of a business, including outright sale, installment sale, buy-sell agreements, and outright gifts. Each of these planning techniques has its own tax consequences which must be considered carefully when you establish your business succession plan. Some of the most common strategies that business owners can utilize to reduce transfer taxes are valuation discounts, irrevocable life insurance trusts and the election to defer payment of estate taxes with respect to closely-held businesses.
Start your business succession planning now
In order for your business succession plan to be successful, it should be put in place as soon as possible. That way you can better ensure that your family-owned business will continue to grow from one generation to the next. Early planning is also necessary if you want to have a comfortable retirement, while still protecting your family’s future and the future of your business.
Don’t forget liability insurance for your business
Business and asset protection planning is not a substitute for liability insurance. Instead, it should only supplement insurance. Asset protection are not meant to deter lawsuits, nor do cover the legal fees required to defend against a lawsuit. If you are sued, it is your insurance company that will be responsible for defending you or paying to settle the claim.
If you have questions regarding business succession planning, or any other small business planning needs, please contact The Vermillion Law Firm, LLC for a consultation either online or by calling us toll free at (888) 567-5745.