Creating A Business Succession Plan
Starting and building a business is a work of a lifetime that requires making unsaid compromises and facing unknown hardships. Yet, when it comes to planning a future for their businesses, most business owners do not have a legal plan in place. The United States Small Business Administration reports that around 70 percent of privately owned businesses, with an estimated worth of $70 trillion, will change hands in the next 10–15 years. Yet, as reported by the National Association of Corporate Directors, only one in four private companies opt to have a formal succession plan in place. If you want to know more about creating a business succession plan for your business and about the legal process involved, consider contacting the experienced New York estate planning attorneys of Jennifer V. Abelaj Law Firm today by calling 212-328-9568.
What Is Business Succession Planning?
In simple words, business succession planning means preparing in advance for a change in the ownership of the business. This involves identifying the events that may cause the ownership change, establishing certain timelines and standard operating procedures, and identifying potential successors or key employees.
Unforeseen and unfortunate events, such as a family feud, death, severe illness, or disability, may require a sudden change in business ownership and management. Having a proper succession plan for a business is like having a will for a person. When a person prepares a will, that person decides what will happen to his or her wealth and property after he or she dies. Similarly, having a business succession plan in place ensures that the business has an exit or a transfer per the owner’s wishes.
Benefits of Having a Business Succession Plan
Creating a succession plan for one’s business has many benefits. Some of these benefits include:
- Smoothing the transition
- Maximizing value and minimizing loss
- Training future leaders or employees
- Identifying weaknesses
- Retaining key employees or creating roles
Smoothing the Transition
If the business is to be transferred to a family member, a succession plan enables a smooth and clear transition and avoids a potential family feud. Rather than leaving it to the court to decide what happens to the business, the decision is made by the business owner in advance when a plan is in place.
Maximizing Value and Minimizing Loss
If the business is to be sold or transferred to a third party, a pre-determined plan about how that transition will be handled helps to maximize the value of the business. Having a succession plan in place also helps to avoid a last minute or sudden sale below the market or fair value.
Training Future Leaders or Employees
Whether the business is to be transferred among family members or to a key employee, identifying the potential successor or successors allows time for sufficient training.
Identifying Weaknesses
While planning in advance, the owner may identify loopholes or inefficiencies in the business and will be able to make a plan to address those weaknesses.
Retaining Key Employees or Creating Roles
Certain employees are important to the success of the business. Further, a business owner may want to involve certain family members in the business. With succession planning, the business owner has the opportunity to retain those employees and create roles as needed for family members.
If you have been thinking about creating a business succession plan but are not sure about the best options for your business, a skilled estate planning attorney at Jennifer V. Abelaj Law Firm can help you better understand the steps involved in creating a sound business succession plan.
Steps To Create a Business Succession Plan
Creating a business succession plan involves considering multiple factors. Some of the most important steps involved in creating a business plan include the following:
- Identifying future goals
- Identifying potential successors
- Conducting a business valuation
- Completing estate and tax planning
- Making necessary changes to governing documents
- Selecting an exit option
- Selecting a team of professionals
Identifying Future Goals
While creating a business succession plan, the business owner needs to identify personal goals are and desires for the business. This includes retirement planning and, if the business is a family business, choosing whether to transfer the business to family members or opt for an exit strategy.
Identifying Potential Successors
A business owner must initiate an honest conversation with family members and identify who is most capable of running the business. Additionally, determine whether the family member is actually interested in running the family business in the future. Sometimes, however, a key employee may be best suited to run the business through an Employee Stock Ownership Plan. If there are no potential candidates, the business owner may consider selling the business.
Conducting a Business Valuation
Conducting a business valuation through an appraiser is important to the process of creating an appropriate business succession plan. A business valuation is done on the basis of revenues, potential incomes, debt, assets, pending litigation, and current market value.
Completing Estate and Tax Planning
Estate and tax planning is one of the most important steps in a business succession plan. Failing to plan these well can lead to unnecessary expenses. However, proper planning can minimize taxes.
Making Necessary Changes to Governing Documents
Making corresponding changes in the organization’s governing documents will ensure that those documents align with the succession plan. Any contrary terms or clauses in the company’s partnership agreement or shareholder agreement may later create a hurdle if not changed accordingly.
Selecting an Exit Option
Typically, business owners select one of four modes of exiting their own business:
- Transferring to a family member
- Making a sale deal with a key employee or a business partner
- Selling the company to a third party
- Closing and liquidating the company
Selecting a Team of Professionals
A good business succession plan addresses the multiple factors that impact the value and longevity of the business. Therefore, it is important to select a team that can handle the many aspects of succession planning.
Contacting a Business Succession Planning Attorney
Creating a business succession plan is a challenging and multidisciplinary task. One needs to consider family relationships, personal future goals, taxes, and other legal matters involved while making a solid succession plan. To learn more about your legal options and how you can create a succession plan for your business, consider contacting an experienced New York estate planning attorney at Jennifer V. Abelaj Law Firm today by calling 212-328-9568 to schedule a consultation.
Protecting Your Assets As An Entrepreneur
After taking the time to launch a new business and gain traction, the last thing entrepreneurs want to do is to lose their personal assets. Protecting your assets as an entrepreneur is essential to sustaining your business in the long term, as well as your personal financial stability. Fortunately, there are ways that you can protect your business and personal assets.
Choose the Business Entity Carefully
The first step of asset protection for entrepreneurs is to select the right business entity. There are many options for establishing a business entity.
Sole Proprietor
Operating as a sole proprietor is typically the easiest type of business to structure. However, there are no asset protection benefits for this type of structure. The personal assets of the business owner are completely exposed in the event of a lawsuit. If a business owner fails to set up a separate entity, the business will be treated as a sole proprietor.
General Partnership
A general partnership is similar to a sole proprietorship in that there is unlimited personal liability for the owner. However, general partnerships consist of two or more people who operate the business together. Each partner is liable for all of the partnership’s debts, including those debts that other partners incur on the business’s behalf. A general partner can act on the other partners’ behalf without their knowledge or consent.
Limited Partnership
A limited partnership can provide some asset protection for an entrepreneur. A limited partnership consists of at least one general partner (as described above) and one limited partner. The limited partner has no personal liability for the debts or liabilities of the partnership beyond what they contributed to the partnership. The general partner is responsible for the day-to-day functions of the business.
Limited Liability Company
A limited liability company is a separate entity recognized by the Internal Revenue Service. An LLC provides liability protection to the owners of the business so that only the business assets can be sought by creditors or litigants. Its owners are known as “members.”
Corporation
Corporations are owned by shareholders who own stock in the corporation. Shareholders elect a board of directors to manage the corporation. The directors elect officers, such as the president, secretary, and treasurer, who take care of the day-to-day functions of the business.
Corporations benefit from asset protection due to their limited liability. Corporate officers, directors, and shareholders are not liable for debts of the corporation or for the wrong acts of employees or agents of the corporation. If a creditor has a claim against the corporation, it generally cannot reach the personal assets of the officers, directors, or shareholders. Instead, the creditor is limited to the corporation’s assets to satisfy their claim.
There are several types of corporations, including C corporations and S corporations. C corporations pay taxes on their business income. Additionally, business owners pay taxes on the income they receive as an owner or employee on their personal tax returns. S corporations qualify for a special Internal Revenue Service tax election that allows them to have their corporation profits pass through the business so that they are only taxed at the shareholder level. There are special rules regarding the types of stock the company can issue to shareholders, the number and type of shareholders, and how profits and losses must be allocated among shareholders to form an S corporation.
A knowledgeable attorney at the Jennifer V. Abelaj Law Firm can discuss your objectives, the structure of your business, asset protection advantages, and tax processes involved with many types of business entities.
Keep Assets Separate
After selecting the proper business structure, it is important to maintain the business as a distinct legal identity. This is easiest to do by keeping personal and business assets separate. Business owners can establish separate bank accounts and credit lines in the name of their business. Also, they may wish to avoid providing a “personal guarantee” when taking on debt in the company’s name, which works to extinguish the personal liability protection a corporate structure provides.
If the business owner owns more than one business, they should also keep these businesses separate and have separate accounts for each of them. Taking these measures can insulate the other businesses in case one business lands in financial trouble.
Purchase Insurance
Asset protection for entrepreneurs is also possible through the purchase of insurance. Businesses may benefit from a variety of insurance products, such as:
- General liability insurance – Covers losses that arise out of the business’ operations
- Professional liability insurance – Covers professionals such as accountants, engineers, and architects from claims based on their negligence
- Property insurance – Covers real property or personal property that is damaged, lost, or stolen
- Employment practices liability insurance – Covers legal costs that arise out of a business’ employment practices, whether or not the business wins the underlying legal case
- Business interruption insurance – Replaces business income that is lost because of a disaster
- Cybersecurity insurance – Covers losses caused by data breaches, ransomware attacks, or other cyber-attacks
- Umbrella insurance – Provides extra liability coverage if a loss exceeds the limits of other insurance policies
Use Trusts Strategically
Another way of protecting your assets as an entrepreneur is to use trusts strategically. Business owners can set up a trust so that it owns the business with the help of an irrevocable asset protection trust. With this type of trust, you receive maximum protection from creditors because you do not have control over the property or distributions. Since the entrepreneur is not the legal owner of the business, creditors or litigants cannot reach the entrepreneur’s personal assets.
Contact Us for Help with Protecting Your Assets as an Entrepreneur
If you would like more information about asset protection for entrepreneurs, the knowledgeable attorneys at the Jennifer V. Abelaj Law Firm can help. We offer customized estate planning and business succession planning services. You can learn more about our services and how we can help by calling 212-328-9568.