Succession Planning and Estate Plans

Succession Planning and Estate Plans

As a business owner part of your business plan should be planning for when your not around. A succession plan for your business should be on your bucket list. Make a plan and write it down. Whether you’re a solopreneur, a member of a LLC, or shareholder of a closely held corporation; I recommend before creating an estate plan for yourself before you create a succession plan for your business. If you’re business is a single member LLC, or a sole proprietorship; your estate and business succession plans can be one and the same. If however, you’re in a partnership, a multi-member LLC, or a corporation your succession plan will look different.

Colorado Business Succession Planning

Some of the goals of your succession plan should be:
  • a timely settlement of your estate,
  • ensuring the business remains operational during the transfer of ownership.
  • ensuring a fair price for your family and business partners.

Although succession planning also involves retirement planning of a business owner, this article discusses planning considerations incapacity or death of an owner. This article is for educational purposes only and does not constitute legal advice.

Estate Planning Documents For Business Owners

If you’re a business owner I recommend at the very least, the following estate planning documents:

A financial durable power of attorney, allows your agent to act on your behalf if you are incapacitated due to illness or injury. Your agent can manage your finances, as well as manage the day-to-day operations of your business.

A will allows you to name someone who will receive your assets, including your business, when you die. It also allows you to nominate a personal representative to settle your estate. This may include being an advocate for your estate during the winding up, closing, or transferring ownership of your business.

A Succession Plan

A succession plan. Here is where sometimes small business owners fall short in their planning. Documents should clearly explain what is to happen to your business if you’re not around. Here are four basic questions to ask yourself:

  • If I get sick or die will my business stay open or close?
  • If I get sick how will you stay open? Who will be in charge?
  • If I die and the business is sold, who has the authority to sell it, and what are the terms?
  • If I die and the business stays open, who gets my ownership interests and under what terms?

Key Personnel

Similar to estate planning, selecting who your agents are is an important element of business succession planning. If you’re in business for yourself, your agent may be your spouse, or a key employee. If you’re in business with others, your agents will be your partners, members, or other members of your organization. Choose your agents wisely.

Also, the personal representative or the trustee of your estate will be negotiating the transfer of your business interests should you pass away. Think carefully who you choose for these roles. Are they ready, willing, and able?

LLC Succession Planning

A succession plan for a single member LLC, is the easiest to create. It can be as simple as a power of attorney. This document can general or limited. Including estate planning transfers in the operating agreement passes ownership interests of the business outside of probate. (Just, another great reason for a single member LLC to have an operating agreement!)

Operating agreements for a multi-member LLCs should also contain a power of attorney as well as estate planning transfers. It should include, how ownership interests are transferred if a owner dies, or becomes disabled. For instance does the deceased member’s portion of the business go to an heir, other LLC members; or the LLC itself.

Corporation Succession Planning

Similar to an LLC, a corporation’s bylaws should contain a power of attorney. A shareholders’ agreement specifies how stock transfers occur upon the death, or disability of a shareholder. Alternatively, a buy and sell agreement is an another option for making stock transfers on the death or disability of a shareholder.

Most importantly, is deciding and creating where the funding is coming from to purchase deceased owner’s interests.

Life Insurance

Life insurance is a key ingredient in creating a succession plan for your business. Families often use death benefit proceeds for payroll and living expenses while the business is sold,or ownership interests are transferred.

On the other hand, life Insurance proceeds in multi-member LLCs or corporations, are used to buy out the deceased partner’s interests. Usually, the surviving business members of a company don’t want to be in business with their deceased partner’s spouse or child. Therefore, owners of LLCs and closely held corporations take out insurance policies on each other to ensure the funds are there to buy out the deceased partner’s heirs.

Life insurance policies written on fellow business members can be either a “cross-purchase agreement” or a “entity-purchase agreement”.

Cross-Purchase Agreements

Cross purchase agreements list each partner as both the owner and the beneficiary, while the insured is the remaining partner. In other words, each partner buys and owns a policy on each of the other partners. If a partner dies, the face value of the policy is paid to the remaining partners. They can then purchase the deceased partner’s share of the business.

For a business with a large number of partners, it becomes impractical for each partner to maintain separate policies on each of the others. Also there can be a great disparity between in the cost of each policy. For instance, if one partner is thirty-five years old and the other is sixty, it will cost a lot more to insure the sixty year old partner.

Entity-Purchase Agreements

An entity purchase agreement is less complicated. This type of agreement allows the business to purchase a single policy on each partner or owner and the business becomes both the policy owner and beneficiary. Upon the death of any partner or owner, the business will use the policy proceeds to purchase the deceased person’s share of the business. The cost of each policy is generally deductible for the business.

Buy and Sell Agreements

Sometimes a buy and sell agreement is part of a succession plan. A buy and sell agreement, requires your ownership interest to be purchased by the business or other owners, when a triggering event occurs, such as death or disability. This document outlines how the value of ownership interest is to be determined and the procedure for how it is to be paid to your family.

The Main Idea

It’s really all about making a plan for when you’re no longer around, and then writing it down. If you would prefer to have the business sold upon your death, you’ll need to plan for that in advance so that family members will be able to receive the best possible price.

Proper business succession planning requires careful preparation. Business owners seeking a smooth and equitable transition of their interests should seek a competent, experienced advisor to assist them in this business decision. (Business succession is just one retirement consideration. 

Schedule an initial consultation to find out more.

Contact me if would like assistance with your business.
email: paul@pmillerlawoffice.com  phone: (303) 900-2529

This article is for educational purposes only, and does not constitute legal advice about your case or situation. There may be exceptions to the information outlined above. Please consult an attorney if you have specific questions about your business or estate plan.



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