Voices: Gloria Petroni| Estate planning for business owners

While estate planning is not the most fun topic to deal with, it remains one of the most important things business owners can do. If a business owner has children or business partners, or both, it is vital. Having an estate plan in place protects your loved ones, employees, partners, customers or clients, and can ensure your legacy lives on in the form of your business continuing should the worst occur.

Business owners have a responsibility to decide how to handle the operations of their business if and when they are unable to oversee the business personally. Will the children be taking ownership of the business? Are the children willing and capable? In the event of business partners, have the partners agreed to work with your children or spouse? Have you agreed to work with theirs? Depending on the structure of the business, there may be governance documents in place that could make these decisions easier. For example, a corporation requires structure such as a board of directors be put in place from inception. The board may or may not act in accordance with the wishes of the owner without an estate plan and buy sell agreement regarding the decedent’s interest in the business and corresponding agreements in place, but it does offer some default. In the case of a sole proprietorship, there are no governance documents in place to handle transitions.

If an owner is considering leaving a business to their spouse or children, there are a couple things to consider. When working with an attorney to set up an estate plan, they will help you to define if your spouse or children are proper replacements in your business and what their roles should look like. Defining those roles will help ensure that the business remains operational without disruption to the extent that is possible. Some business owners choose to define eligibility for inclusion in the business by the amount of time a child (or spouse) has invested into the business to guarantee that the most experienced and capable family members are taking responsibility for the business.

It is also important to truly consider whether your family is better off receiving money for your portion of a business versus the business itself. Owners may consider leveraging life insurance policies to help make these transitions possible. One mechanism would be for the owners of the business to take out life insurance policies that benefit the other owners, offering them the capital to buy out family members without jeopardizing the survival of the business.

If children are not interested in or capable of taking over the business and there are additional business partners in the picture, other arrangements can be made. There are situations in which a party can take a non-partner role, where they do not take a leadership role in the business but still collect owner shares from the company. A buy sell agreement amongst business owners is also something that an attorney will prompt you to implement. A buy sell agreement essentially defines the exit strategy for partners or shareholders. The agreement determines what will happen in the event that an owner exits the business for any reason including retirement, injury, death or divorce.

Outside of children, spouses and partners, key employees may be another component to consider in a succession plan. A buy-sell agreement can grant a key employee the right to buy into the company. If there is a long-term employee that knows the daily ins and outs of the company, it may be in the best interest of the business to give that employee the option to become an owner should something happen to the current owner. This can greatly impact the legacy of business, as it assists with employee retention and can keep the business running as smoothly as possible during a period of transition. It is also possible to name such a person as a trustee to the business to oversee operations.

The loss of an owner is a tough time internally but also may cause a loss in confidence among customers or clients, which can result in some financial strain. Make sure the business is able to continue operating and can weather a storm either by ensuring the capital is available to do so or that any line of credit used is not connected to the owner rather than the business entity. It isn’t uncommon for lines of credit to be tied to an owner, especially in the first few years of operation before creditors will grant those lines to the business entity.

As a business owner, there are many responsibilities you take on as you run your business. Taking steps to make sure someone else is able to do that in your absence can give you freedom now and the piece of mind to know both the business and your family will be fine no matter what occurs.

Gloria Petroni is the owner of Petroni Law Group. With more than 38 years of experience in family law, Ms. Petroni focuses her practice on divorces involving business and estate planning. She holds a J.D. from McGeorge School of Law at the University of the Pacific and a LL.M. in taxation from the University of Miami.