PCA Articles

Preserving Your Business Legacy

Preserving Your Business Legacy

Small businesses have been the cornerstone of our country for hundreds of years. There is an estimated 32.5M small businesses in the U.S. alone. However, only 33% of those will make it to the second generation, and only 15% make it to the third.

As a small business owner, you may have a strong emotional attachment to your business. To ensure that this legacy and business is protected for future generations, it is crucial that you do the proper planning.

Understand Everyone’s Goals

The key to a smooth transition, regardless of when it happens, is to understand everyone’s goals. Because a business can be such a large and complex asset, it is necessary for everyone to be prepared for this transition (whether it occurs at your retirement or death).

Your Goals

It is important that you take the opportunity to sit down and evaluate your own goals for the future and your goals for your family and the business. Because the business may be a substantial or sole source of income, deciding to retire and hand over control may be financially (and emotionally) difficult. It signals a new chapter in your life, and you may be wondering how you are going to financially support this new chapter without the income from the business. A well-thought-out transition plan can enable you to transition out of the business in the way you want.

Especially if the business has been in your family for generations, it is probably important to you that the business continues to be operated by future generations. To accomplish this goal, there are several issues you should consider: What if not all of my children want to participate in the business operations? What if someone in the next generation already has or could have creditor or judgment issues? How do I protect the business and provide for my family? With the proper planning, we can help you address these concerns and achieve your ultimate goals.

Family’s Goals

The concerns of family members that are in line to receive the ownership and control of the business are likely to differ from yours. By wanting to continue the business operations, it is clear that they value the legacy of the business and the history it represents to the family, but they may have different needs.

With a highly valued asset, the next generation will want to receive it in a way that minimizes or eliminates transfer taxes. The last thing your family wants is to have to sell the business to pay the estate tax bill upon your death. As they take on a larger role in the business, the next generation may want to have more decision-making authority and even partial ownership. By planning ahead, we can help structure a transition that allows for a smooth transfer of control.

Obviously, there is the potential that no family members have an interest in the business as well. If that is the case, then it’s time to consider other options.

Evan and Davis

Make a Plan and Keep It Up to Date

Estate Plan

Just like a productive business, a well-prepared estate plan needs to utilize the right tools, such as a will, trust, and powers of attorney, to carry out your objectives.

A properly executed trust and financial power of attorney will help protect you and the business should you become incapacitated or otherwise unable to manage the business. As with any business, when the key person becomes incapacitated, things can go off the rails if there is no one ready to step up and take charge. These documents appoint a person, ahead of time, to make decisions on your behalf, instead of waiting until you become incapacitated and making your family go to court to appoint someone.

Upon your death, a trust helps to ensure that what is passed to your surviving spouse or beneficiaries is protected from future creditors or judgments. It also allows the assets to be distributed according to the terms of the trust without interference by the probate court. Not only does this create a smoother and quicker transition in ownership, but it also maintains family privacy and reduces expenses.

IMPORTANT: You need to make sure that you work with an experienced estate planning attorney to ensure that any trust that is created is funded with business assets.

If you already have an estate plan in place, then it is a good idea to review your documents on a regular basis. In life, there are many personal and legal changes (births, deaths, marriages, divorces, illnesses, bankruptcies, lawsuits, etc.) that can occur. Having outdated documents can sometimes be worse than not having any documents at all.

WARNING: It may be tempting to title assets jointly with a family member or to execute a transfer-on-death deed to facilitate an “easy” estate plan. While these solutions will transfer the property to the survivor without much involvement by anyone else, these types of ownership are full of disastrous possibilities that could undo everything you have worked hard to build by subjecting the business to the claims of the creditors of all the other owners, as well as yours.

Federated Insurance

Business Planning

Estate planning is just one prong in ensuring the survival of the family business. It is important to make sure that the business structure and operation is set up to accomplish the family’s objectives as well. The first step is to evaluate the current business structure being used for the business.

Some businesses, regardless of size, are held as sole proprietorships or jointly with a spouse. If this is the case, it is likely you own the equipment in your own name. Sole proprietorships are attractive because they do not require any filings, except for registering a trade name if you want to operate the business under a name other than your own. There are also no annual filing requirements or fees owed for this type of business structure. While a sole proprietorship is incredibly easy to form, since it happens by default, it also opens you up for unlimited liability since you and the family business are considered to be the same legal entity. This means that your personal creditors could look to your personal assets to recover judgments against you.

Alternatively, a limited liability company (LLC) can be formed to protect assets, reduce tax liability, and provide for an orderly transfer of control and ownership with minimal conflict between family members.

A properly implemented decision-making structure can also provide continuity in operation should you become incapacitated and unable to participate in the business activities. Tools such as a buy-sell agreement, management agreement, or employment agreements can be used to help facilitate this smooth transition. It is important to note that with either of these business structures, the proper business formalities must be followed, such as annual filings and payment of the required fees to the secretary of state, to maintain the liability shield around the business.

Liquidity Needs

More than likely, the business is the largest asset you have. This can pose a challenge when funds are needed for your long-term care, and/or covering any state or federal tax liability that may be assessed on your death.

Failing to plan ahead may require your family to sell the business in order to pay for the medical bills, trust or estate administration expenses, or other debts when you become ill or pass away. By working with a trusted advisor team, you can protect your family and your business through all stages of life.

We’re Here to Help

We understand the importance of the continuation of your family business and legacy for future generations. We are here to assist you with a coordinated plan and guidance to ensure that this legacy will be a lasting one.

About The Author

Brian Johnson Headshot

Landon Long has a busy estate planning practice for individuals and families. Closings of company transactions and real estate agreements of all sizes, including large transactions totaling $100 million or more, have supported Landon’s expanding corporate practice. He has received several honors and distinctions, including the American Jurisprudence Award for his class, the highest honor in professional responsibility