According to the U.S. Small Business Administration, approximately 28 million small businesses operate in our country today. Needless to say, small businesses owners have a direct impact on our economy, and also provide direct financial support for their families through their endeavors. Devoted to its day-to-day operations, small business owners often fail to consider the impact their death or incapacity would have on the future of their business, and in turn, how their families would be impacted in the absence of funds generated from their professional efforts.
Without a plan for succession, family members may find themselves running the business with a family member’s former business partner, or may be forced to sell the business in an effort to meet continuing financial obligations. Various estate planning tools can be utilized to eliminate the uncertainty of a business owner’s passing, one of which is a buy-sell agreement. A buy-sell agreement is a contract between shareholders or owners of a business that establishes under what circumstances an owner must sell his or her interest in the business. These circumstances usually include retirement, disability, and death. Used in conjunction with a personal estate plan, a buy-sell agreement can provide surviving family members or business partners with a clear plan for the future of the business.
Even if a business operates as a sole proprietorship, a buy-sell agreement can allow an owner to place restrictions on how and when the business assets are sold by the heirs. Agreements are often drafted to become effective upon the death of the decedent and provide that the estate will sell the business within so many days after the decedent’s death. The buyer is often a key employee of the business, and is in a much better position to continue on with business operations than are the family members of the decedent. Used correctly, these agreements can also help individuals avoid estate taxes that could otherwise be assessed against their estate.
For many small-business owners, planning for the future is something they do on a daily basis. Expecting the unexpected has to be part of that plan. To determine what estate planning options are best for you and your small business, consult with an experienced estate planning attorney and your tax advisor.