Just like individuals engage in estate planning to put their financial and health care needs in order before incapacitation and death, so should businesses. Particularly if your business is family owned, a professional practice, or solo business, making logistical and financial decisions about who will take over your business upon retirement, death or disability should be top of mind for your business.
Succession planning, briefly defined, involves creating a plan for someone to either own or run your business after you retire, become disabled, or die. Business succession planning is common at publicly traded companies, but all entities, regardless of status should be prepared to pass control of the business to others at retirement, incapacitation, and even death. Below are three important steps your business can take today to develop a succession plan.
- Find a successor
Especially if your business is family owned, your succession plan may include passing the business to a family member. Consider transferring ownership through your estate planning process. Larger businesses will require you to prepare people for management and leadership roles to replace current managers and you when you and current personnel retire, become incapacitated, or die.
A review of who can take over your business may lead you to conclude that no one currently can. You may need to make an outside hire to continue operating the company when you retire, become incapacitated, or die. Some professional organizations like medical practice groups cannot be easily transferred to non-medical personnel to run. Any professional license granted in New York is non transferable.
Sometimes, no one in your family wants to take over the business. In those situations, understanding potential buyers and the market for your business will be paramount in achieving value for oftentimes a lifetime of work.
- Train your successor
Proper planning will enable you to train your successor and share your wishes with respect to how your business should be run in your absence, especially if you are only temporarily incapacitated and plan to return to your position when your health improves. People are living longer, and once fatal diseases are now curable. If you are not able to return to work, one of your managers in a similar circumstance, may return or demand to return pursuant to federal and New York State medical leave laws.
- Ease Tax Exposure
Closely held family businesses are taxed differently from other business entities. Tax exposure is heightened on death forcing the payment of certain taxes that in life you were able to avoid or defer. You may not want to saddle your heirs with tax debt that would wipe out all of your assets. In such cases, succession planning and estate planning become intertwined with the family business. Multiple types of taxes must be considered when planning this type of succession, including income tax, gift tax, generation-skipping tax, and estate tax.
Start business succession planning as soon as possible. It may take you several months or years to develop your plan. Once crafted, it should be reviewed and updated to reflect changes to your business or personnel. Starting sooner, rather than later, will give you more control and flexibility with your planning. Consult an estate planning attorney about putting the proper estate documents in place, especially for succession planning in a family business or closely held corporation.