Business Succession Planning
If you have business or business interests, you should consider what will happen to that business or interest when you pass away or if you become incapacitated. In Colorado, Denver business succession planning should be an integral part of your overall estate plan regardless of your degree of participation in its operations.
The overwhelming majority of businesses in the US are family owned with these enterprises responsible for half of all wage earners in this country. For example, Wal-Mart is the largest private employer in the US and is family owned. While few businesses approach this magnitude, many are subject to serious tax implications and other consequences when being transferred.
Business succession issues arise when you retire, become disabled and when you pass away. You can achieve an easy transfer of the business by having a properly crafted business Buy-Sell Agreement in place.
Purpose of Having a Business Succession Plan
A successful business plan provides for the easy transfer of your business to a family member, business partner, third party or to the business entity itself. A Denver business succession plan will consider the type of business structure in place such as a sole proprietorship, corporation, LLC, partnership or limited partnership. Having your family business lawyer draft one for you can achieve any of the following aims:
- Significantly reduce or even eliminate estate taxes
- Avoid probate
- Establish a value for the business
- Determine who will run the business operation
- Provide for the financial interests of heirs who will not be involved in the business
- Structure the business to be an entity that suits your interests and protects your assets
- Provide for the transfer of your interests to family members who will be involved in its operations
- Prevent sale of any family member’s interest to a non-family member
- Have a mechanism to resolve business operation disputes
- Provide for funding of the company or transfer costs and taxes
- Restructure or shift responsibilities if a corporate officer, partner or CEO retires, departs or passes away
The Buy-Sell Agreement
Your Buy-Sell Agreement is based on the type of business structure you have such as a corporation, LLC, sole proprietorship, partnership or limited partnership. If a corporation or LLC, your agreement has to comport with all corporate formalities in the transfer of control to another party. Its terms dictate how your business will be transferred upon your retirement, death or incapacity.
- Entity Buy-Sell Agreement-the terms of this type of agreement govern the sale of your business interest to the business entity, which can be corporation, LLC or partnership.
- Cross-Purchase Buy-Sell Agreement-in this agreement, your interest are bought out by your partners or other owners.
- Wait-and-See Business Agreement-the company or entity has the first option to purchase your interests before the other owners
- One-Way Business Agreement-your interests are to be purchased by a third or outside party
Funding the Purchase Obligation
Getting fair value for your business or interests is essential, which also pertains to the value of your estate for tax purposes. Life insurance proceeds can be used to pay any estate taxes. You should also consider disability insurance that can be used to pay off business obligations and any applicable taxes.
Dan McKenzie is a well-regarded Denver business succession lawyer who has represented the interests of family businesses for years. He can structure your business, advise on a pertinent business succession plan and ensure that your goals are realized regardless of the event or contingency that triggers the transfer.