4 Reasons to Plan for the Succession of Your Business Now

Author : Camputaro & Associates
Oct 14, 2019

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For large corporations, the loss of a partner in the business can be jarring, but isn’t typically life-threatening for the company. However, for small businesses—particularly family-owned businesses—the death of an owner can crumble the company entirely. If you own a small business, it’s vital that you plan for the succession of that business in the event of your death. Here are four reasons to do so right now.

Control What Happens to Your Business

If you want a say in what happens to your business after you pass away, then you need to plan for its succession. Otherwise, the fate of your business will be based on the business’s structure. Here’s a quick look at how various business structures are handled upon the death of the owner or a partner:

  • Sole proprietorships – In a sole proprietorship, if the owner dies, the business is dissolved. Business assets are sold to cover debts, and the remaining value is distributed according to the owner’s will.
  • Corporations or S corps – In the event of an owner’s death in a corporation, the deceased’s estate becomes the owner of the individual’s shares. Those shares are then divided among their heirs. If you have a sole heir who is interested in owning the business (and who you think would manage the business well), this may be fine. However, it can quickly saddle an individual with responsibilities you may not have chosen to give to them.
  • LLCs – Most LLCs operate under an agreement that specifies what happens when a partner dies. However, if this is not present, the company may be dissolved, and the assets distributed, regardless of the other partners’ wishes. This varies by state.
  • Partnerships – So long as a partnership has a written agreement, most businesses operating as a partnership don’t die when one partner passes away. However, without this, all business would cease upon the death of a partner, and the company would be dissolved and distributed.

As you can see, without any sort of planning or agreement, many business types are dissolved and distributed upon the death of an owner or partner. But if you would like to have more control over what happens to your business upon your death, planning for your business’s succession can allow you to do that.

Select Who Takes Over

If you have a family-owned business, proper business succession planning allows you to select who will take over the business when you pass away. Whether it’s a sole proprietorship or a partnership, you can choose who inherits your portion of the business. This allows you to not only ensure that your business is not dissolved when you pass away, but that it is put into the hands of someone you trust.

In the case of many partnerships, the initial agreement between partners will stipulate that the surviving partner can assume the deceased’s shares, and obtain full ownership of the business. However, other planning is often required for this to happen, which leads us to our next point.

Ensure Costs Are Covered

Often, passing on a business comes with expenses for the individual inheriting the company. Through proper planning, you can ensure that those costs are covered, either through the sale of assets or through life insurance.

In the case of partnerships, many partners will obtain life insurance policies that would cover the cost of their share of the business, with their partner listed as the beneficiary. This allows the surviving partner to retain ownership of the business upon the other’s death, without having to scrape together funds to cover the full cost of the business. The same goes for LLCs.

For sole proprietorships, you can provide your successor with additional funding to support the business in the wake of your death, and assist with any business-related debts in your name. For corporations, you can provide your desired successor with the necessary funds to retain the shares you’ve willed to them.

Speed the Process

When there is no plan in place, inheritance of any kind inevitably takes much longer to be worked out. This is especially true of businesses. In the wake of a person’s death, many small businesses can get tangled up in valuation and, as a result, suffer from cash flow problems that ultimately topple the company. When you plan for your business’s succession, you can speed the process, often avoid the valuation process altogether, provide funding for your business’s future, and ensure that it continues to operate in your absence.

If you have a small business and need to make plans for the business’s succession, contact us right away. It is always better to handle these things sooner, rather than later.

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Camputaro and Associates
Certified Public Accounting Firm
136 N. Orchard Street, Suite 8
Ormond Beach, FL 32174
(386) 255-2511