A Step-by-Step Guide to Navigating Estate Planning as a Small Business

As a small business owner, you have invested countless hours and exhibited unwavering dedication in meeting and exceeding your goals. It is no secret that creating and managing a small business is an extremely difficult and impressive feat deserving immense admiration. You have overcome many challenges and obstacles, demonstrating your resilience, determination, and entrepreneurial spirit. You have built an incredible legacy and secured a prosperous future for your family to enjoy. Your last, and arguably most important, task is to make sure your hard work does not die with you. As a small business owner, estate planning is essential. You must make sure that your business is passed down in a safe and organized fashion, so that your legacy can be preserved and kept by the ones you love. Below we will walk you through the steps you should take if you own a small business to create an effective estate plan.

Estate Planning for Small Businesses

Steps to a successful estate plan as a small business

1. Create an inventory of your assets, agreements, and liabilities –– The first step to estate planning is taking into account any and all assets and agreements that help the business run and any liabilities. Examples of such assets, agreements, and liabilities include:

a. Real estate where your small business conducts its operations, including storefronts or offices. If you rent or lease such spaces, ensure that your rental or lease agreements are easily accessible. If you own such spaces, ensure that the deed is easily accessible and that the real estate is jointly owned or written into an estate plan in such a way that will avoid the probate process, such as having it in a living trust.

b. Contracts that you have entered into, such as those with distributors, employees, private contractors, maintenance staff, or delivery companies.

c. Equipment or machinery that you own, rent, or lease, such as company vehicles, phones, laptops, or cooking or food processing equipment.

d. Intellectual property, trademarks, copyrights, or patents that you or your business are the owner of.

e. Bank accounts registered to your business that you use to pay employees or business expenses or that you use to pay the mortgage or rent for your storefront or place of operation.

f. Any life or disability insurance policies that you have taken out for your business.

g. Any debts that the business has incurred and that need to be paid off.

h. Any creditors that the business must pay off.

2. Identify key individuals and successors –– One of the most essential steps in any estate plan is identifying trustworthy beneficiaries and trustees. These are the people entrusted with the task of settling your legacy or continuing to run the business after you pass. In order to do this successfully, you must take into account all of your business partners, employees, and family members that could potentially be considered for the role. This is not a job that you can spring on someone unexpectedly, so it is important to discuss with each party and give them the necessary tools that they need to succeed. By taking care to assign and explain each important role, you are taking productive measures to ensure that your legacy is kept safe. It is also important to understand the personality traits and skill sets that you should look for in a prospective successor and the red flags to avoid. Some key personality traits and skill sets to look for include:

    • A clear vision for the future of the business.
    • Leadership ability.
    • The integrity to stick to promises and commitments made.
    • A detail-oriented approach.
    • Good communication skills.
    • A strong personality with the abilities to compromise and delegate.
    • Resilience.
    • Excellent strategic thinking.

Some red flags to avoid in a perspective successor include:

    • The person having no interest in your business.
    • Greed or avarice.
    • An uncompromising personality.
    • A lack of honesty, integrity, and trustworthiness.
    • A lack of knowledge or skills in the field of your business.
    • A lack of vision or a vision for the business that does not align with your wants or values.
    • A preference for running the business in a way that does not align with your wants or values.

Not everyone is right for ownership or senior positions in a business. Understanding the    personality and character of your prospective successor(s) is crucial in making the right succession plan. This is the best way to ensure you are assigning the right people to important positions that will allow your business to continue to function smoothly and effectively. 

3. Develop a succession plan –– How will the business be transitioned into the hands of your successors? How will it be run? Who will do what? These are all questions that you can and should answer while you are building your small business estate plan. You can appoint different authorities to different individuals, for example, someone could be in charge of client relationships while another could be the decision-maker. There are many ways to structure the transition of your business, and it is necessary to make an informed decision that you believe will yield the best result. Any such decision should be made at the time that you create the estate plan for your business, which should take place long before any physical or mental incapacity or illness. Estate plans should be created as early as possible, and ideally as soon as the business is on its feet and is reasonably able to project continued success. The earlier you create an estate plan, the earlier you can contemplate a succession plan and ensure that you are choosing the right candidates to succeed you and ensure your business’s continued success.

4. Consider creating a buy-sell agreement –– If you have a business partner, it is important to consider creating a buy-sell agreement. Business politics can get ugly, and covering all of your bases is good. In the event that one of you passes away, the question is, how will their shares be divided up and sold? Figuring out any internal conflict and preempting any issues will benefit you and your families in the long term. 

5. Create an estate plan –– Now that you have gone through the motions of accounting for all your assets, consulting with family and partners, and developing a succession plan, it is time to craft your estate plan. It is important to note that as a small business owner, you will also need to have a personal will and appoint your power of attorney to someone you trust. This is so that in the case that you pass away or are incapacitated you have an executor of your wishes present to assist with the business transition. It is essential that you use a knowledgeable and experienced attorney who can help you, your family, and your business get the best out of your estate plan. 

6. Continuously update your estate plan –– Once you have crafted your small business estate plan, you may think that you are done, however, that is not really the case. Life is full of unpredictability and as factors change and your business structure evolves, you must continuously update your estate plan to include those changes. Having a very dated estate plan is almost as bad as having no estate plan at all.

Estate planning is important for everyone, but it is particularly crucial if you are the owner of a small business. Regardless of the stage that your career is in, it is essential to establish a comprehensive backup plan in the event of an untimely passing, not only for yourself but for your business partner as well. By initiating an estate plan early on, you proactively safeguard your small business and its future. The unexpected passing of a business owner could lead to unfortunate consequences for their family, customers, and the business itself. Without a thoroughly reviewed plan in place, you stand the risk of losing everything that you have built. Having a solid and up-to-date estate plan created in collaboration with a trusted attorney is of the utmost importance. This plan should encompass all of your business assets, your succession plan, your successors, and more. If you have any further questions or are ready to start your estate planning journey, please contact the Law Office of Inna Fershteyn at (718) 333–2394.