Did you know that the majority of small companies fail within the first generation? It's not because these firms aren't sustainable; rather, many times it's due to errors in estate planning and communication. Let's say you have a plan when you leave your pet for the weekend. You're aware of who will feed it and how much it will cost. So, what happens when you take a weekend break from your small business? More significantly, what will happen if you quit your company for an extended period of time—say, indefinitely? If a company owner passes without a strategy in place, the survivors are left in the dark. While your company may be humming well right now, how would it fare if you are not present? Executing someone's estate after death is a completely different, and sometimes difficult, task. If you want to keep your business running after your death, you must prepare what will become of your estate, which includes your business. The first stage is to communicate with your family and business partners, and the second is to memorialize your decisions.
The following includes estate planning guidance for small businesses owners:
Minimizing Taxes
One important reason for estate planning is to reduce the amount of taxes your estate will owe. You've worked hard to make your company a lucrative organization. Don't give the IRS the benefits of your effort in the form of estate taxes. This sort of tax typically runs from 35 to 50 percent of the business value and is owed nine months after your death.
Because most company assets are not liquid, paying estate taxes frequently necessitates the sale of the business. Small enterprises are frequently sold for far less than their true value as a result of the nine-month restriction. Fortunately, estate planning can protect your company from going bankrupt.
Sections 303 and 6166 of the Internal Revenue Service reduces the tax burden on small company owners. Section 303 enables your estate to redeem your stock at a reduced tax expense. This is a once-in-a-lifetime chance, and the stock value must be greater than 35% of your estate. Section 303 is commonly used by beneficiaries to cover inheritance taxes.
Section 6166 allows small business owners to postpone estate taxes. To qualify for Section 6166, your business interests must account for more than 35% of your adjusted gross estate. If your executor is qualified, the estate tax can be paid in ten yearly payments. This relieves you of the stress of having to create a bulk amount within 9 months after your death. The first installment is not due for five years under 6166. This allows your company time to produce enough money to cover the taxes.
Buy-Sell Agreements
A buy-sell contract is signed between shareholders or partners that provides a company succession plan in the event that one of the owners dies or becomes incompetent. A buy-sell agreement's main advantage is that it specifies a sale price for the business as well as your portion of the firm. A buy-sell agreement allows you to specify whether you want your partners to buy out your stake, if you want to bar specific persons from participating in the firm, or if you want your heirs to sell your piece. As a result, family members realize they are getting a fair price now that the company pricing has been determined.
A buy-sell agreement is merely another part of successful business, just as any solid company strategy anticipates the future. While drafting a buy-sell agreement necessitates open conversation with both your family and your business partners, which may be tough, it will provide the groundwork for the future, substantially lowering the possibility of any possible conflict.
Life Insurance
Where can partners obtain the cash to buy out a deceased partner's interests if the firm assets are not liquid? Life insurance is frequently used to provide the necessary capital. This is a typical corporate practice in which each partner obtains an insurance policy in which the other owners are named as beneficiaries. This method allows surviving proprietors to acquire the deceased's part of the business from his or her estate with tax-free earnings.
Sole Proprietors
If you are a sole proprietor, you are well aware that your business is inextricably linked to your personal assets–in some ways, your business is you. You probably need a clear strategy for what should happen when you pass away. Personal assets might be utilized to pay off corporate obligations. If you wish to pass on the business, delegate, and prepare your successor. If you wish to sell the business, conduct the necessary research to make the sale simple and affordable for your heirs.
The key to effective estate planning, like with any small company owner, is communication and documentation. You should discuss with your family about a smart future course of action. However, you should also memorialize those preferences in an estate plan to avoid future conflicts.
Family-Run Businesses: Considering their Heirs
In a family-run firm, some heirs may be active in the business while others are not. So how do you divide your financial assets? Many people prefer to divide assets based on the amount of contribution of a relative. Assume that two of your offspring will take over the family company. Do you want your uninvolved third kid to have an equal share? Perhaps you want siblings to buy out the third share. Whatever you select, managing these sorts of choices is important. After all, the death of a family member is difficult enough on its own. Proper estate planning, at the very least, permits your business to move smoothly.
You can speak with an estate planning professional at the Law Office of Inna Fershteyn to help you map out an estate plan for your small business. Please contact us at (718) 333-2394.