Category: Business Succession

Houston Business Lawyer: Succession Planning for Your Small Business is Crucial for its Survival

Posted by Kim Hegwood on with 0 Comment

You have worked hard for the success of your small business, but have you thought about what will happen to it after you are gone? By engaging in Succession Planning, the small business owner can ensure that his or her wishes are followed should the unthinkable occur. Not only does this kind of planning make for an easier transition on those left behind, but it also saves money and can literally keep the business from failing altogether.

Your small business is a part of your estate, and just like your home and other assets, planning needs to be done for how it should be handled upon your death. You will want to go over your options with a qualified Houston wills and estates attorney and make them legal and binding through the proper documentation. Of course, you will also want to communicate with those individuals who will be charged with executing your wishes and keeping the small business running smoothly.

Unfortunately, the death of a small business owner can also spell the death of the business. Estate taxes can be so expensive that the business just cannot survive paying them. Within nine months of your death, as much as 50% of the business’ worth can be due to the IRS. It is pretty hard to imagine a small business surviving the loss of 50% of its value.

Laws like this play a role in the fact that small businesses do not typically survive through the generations. According to The Small Business Review, only about 30% of family businesses make it to the second generation, 12% to the third generation, and 3% to the fourth generation. Obviously, there are a number of factors involved, but the need to pay taxes and take care of other transitional costs create a significant burden in passing a business on to heirs.

By planning in advance, you can take advantage of Section 303 and Section 6166 of the tax codes. These breaks do things like limit taxes on your heirs’ stocks and allow for the estate tax to be paid over the course of 15 years, respectively. Of course, these tax breaks are best utilized when they are understood in advance and the small business owner has made plans for their implementation.

If you have questions about planning for the future of your family business, please feel free to give us a call at Hegwood Law Group:(281) 845-8538.

Houston Business Planning Lawyer: What Happens to Your Sole Proprietorship When You Die?

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Sole proprietorships are a common type of business. For sole proprietorships, the business owner and the business are the same legal entity. The business owner of a sole proprietorship is personally responsible for any debts the business incurs. However, unlike a corporation, the sole proprietorship belongs to one person and is legally a business indistinct from that one person. Once the sole proprietor dies, the business does too, creating estate planning problems.

Problem: The business’s assets go into your estate. Your business is legally no different from you, even if you have a tax ID, even if your business has a storefront, employees, and assets that are clearly not personal, like manufacturing equipment. If you die with or without a will, the assets that you use in your business could go into Harris County probate for weeks, months, or years.

Problem: Your business creditors can go after any part of your estate. If you owe money to any entity, they will get first crack at your estate. Say you have a bad year. You are $30,000 in debt, and your business doesn’t have enough assets to cover the costs. If you die with this debt, almost anything in your estate may be liquidated to cover business debts, including your house if you are single.

Problem: If my heirs run the business, they may run into legal problems. Your heirs of your estate might be vulnerable to lawsuits if they try to wind down the business themselves. In Texas, your business dies with you, and there may be legal problems if your heirs run the business as if you had not died.

Solution: Create a trust to wind down the business. A Houston will lawyer can help you create a trust for your sole proprietorship so that upon your death, the trust gets the assets, and the administrator of the trust can wind down your business and have any remaining assets go to your estate. This may or not be available, depending on the type of business, so check with a Houston estate lawyer first.

Solution: Create a buy-sell agreement affective upon your death. In Texas, you may be able to create a buy-sell agreement with someone, like your adult children, to go into effect upon your death. Your estate lawyer can help you create this agreement. Essentially, you sell your business to someone, but you continue to run it in good faith. When you die, the sale is complete. They can stay in business, or they can shutter it.

Solution: Incorporate your business and will your shares to your heirs. A sure way to make sure your heirs get your business without losing an inheritance from your personal estate is to incorporate before you die. This makes your business a distinct legal entity, and you can own some or all the interest in the corporation. Your Houston estate lawyer can draft your will so you portion the corporation amongst your heirs as you see fit.

If you have questions about how to best plan for the eventual succession of your business, feel free to contact our Houston estate attorneys to schedule a consultation.

 

Don’t Use Your Will for Business Succession

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A recent article from NJ 101.5, “Should you leave a business in your will?,” asks whether using a will for business succession may have estate tax consequences. That tax might have been substantially reduced or eliminated with good estate planning by parents who want to transfer a business to their children or other relatives. 8-3-2016

The federal estate tax exemption is $5.45 million per person this year, plus any state exemption amount. That means if the business is generating some decent revenue, there’s a good possibility that estate taxes could hit after the parents are gone.

Just a third of all family businesses make a successful transition to the second generation because many issues can create obstacles. For instance, the interest of one family member may be different than other family members.

As part of this process, you should identify the successors, the active and non-active roles for each family member, and the additional support from family members needed by the successors.

Small family-owned businesses frequently will transfer shares of the business during the owners’ lifetime to address transfer tax consequences. These transfers can be structured so that the owners will keep control during their lifetime.

Parents, speak with a qualified estate planning attorney to assist with wise succession planning. That way you can decide the most effective way to transfer your business without incurring unnecessary transfer taxes.

Reference: NJ 101.5 (June 15, 2016) “Should you leave a business in your will?