Almost everyone can benefit from an estate plan. But for small business owners, an estate plan could help your business avoid litigation or even liquidation upon your death.
Small business owners face different tax issues, including estate tax, that many salaried employees never worry about. Depending on the ownership structure of your business, your estate could own a piece of your company's assets and get taxed accordingly.
Why Estate Planning for Small Business Owners Is Different
Small business owners have different concerns than employees. They usually pay income taxes based on dividends or the company's revenue rather than a salary. They usually have an ownership share in the business entity or hold the company's assets as a sole proprietorship. They must also plan for what will happen to their business after they die.
Some issues you should discuss with your estate planning lawyer include:
Business Continuity
It’s important to know what will happen to the business after you die and how the transfer of power will happen. For some small businesses, like law firms or medical practices, your partners cannot or will not want a non-professional as a co-owner of the business.
You and your partners will need to have a buy-sell agreement in place so your estate can sell your share of the business. In a typical buy-sell agreement, your surviving partners get a right of first refusal to buy your share from the estate.
If you have a sole proprietorship, the business might have difficulty continuing without you. Your company's assets will become part of your estate and could get liquidated to pay creditors and heirs. To avoid this, you might want to create an entity, like a limited liability company or corporation, to hold your business assets. This will keep all the assets together after you die so someone can take over your business.
Family businesses pose complex issues. Many family businesses do not have a formal legal structure. Before you can plan your estate and how ownership of the business gets distributed, you need to organize your business.
Estate Taxes
The IRS and certain states impose estate taxes on large estates. Estate taxes encourage taxpayers to spend their money and give it away instead of amassing it.
Taxing authorities calculate estate taxes on all the assets you own on your date of death. The federal estate tax threshold in 2022 is $12.06, and California phased out its estate tax in 2005.
As a result, most individuals do not pay an estate tax. But estate taxes can catch small business owners. This happens for a couple of reasons: For one, the value of your company's share is included in your estate. Secondly, the value of a sole proprietorship’s business assets gets included in your estate.
The problem is that these interests are typically not liquid. For example, suppose that you have a landscaping business. If you hold it as a sole proprietorship, your estate includes your work trucks, tools, and equipment. Your estate could pay taxes on these assets.
Once again, your estate plan will include organizing your business. If you have a separate business entity, you reduce the risk of inadvertently triggering the estate tax with your small business.
Recordkeeping and Documentation
Small business owners are usually so busy running their businesses that they do not keep others in the loop about their business. But since your estate will include your ownership share of your business, your executor and your estate lawyer will need access to your business records and documentation.
The Value of Business and Estate Planning
You need to ensure that your estate plans match your business continuity plans. Working with a business succession planning lawyer can help you integrate your plans so your death does not throw your estate and your business into chaos.
To discuss how you can plan for your business and your estate after your death, contact Heritage Legal, PC, a Palm Springs, California, estate and business succession planning law firm, for a free consultation.