Own a Business?  You Need a Plan.

Mompreneurs, dadpreneurs, parentpreneurs – whatever you want to call them – are on the rise.  Parents who find balancing the corporate grind and a meaningful family life to be at odds are increasingly creating their own path – one that allows them more flexibility and, often, a more-fulfilling career.

Planning is a constant in the lives of parentpreneurs – everything from your marketing strategy, to your cashflow needs, to picking your child up from daycare, is a daily exercise.  What can often be overlooked is the importance of creating and implementing a plan for what would happen to your business – and to the income you rely on – in the event of your death or disability.

What that plan should look like largely depends on the type of business you have.

Owner-Dependent Businesses

If you have a personal service business that is highly dependent on your participation, e.g., virtual assistant, interior design, or professional services business with few capital assets, your business will likely terminate upon your death.  While only simple planning is necessary for these types of businesses, it is nonetheless important to have a plan in place.

Disability planning is particularly important if you have an owner-dependent business, since the business cannot generate any income in your absence.  Unfortunately, it can be difficult to purchase a disability policy if you have a new business, since your income is not yet established.  After a few years, you’ll have more evidence of your earnings and should be able to get a decent policy.

In addition to basic estate planning documents, such as a will, power of attorney, and healthcare proxy, you should make sure that someone is authorized and has sufficient information to wind down outstanding business accounts and inform customers that the business has terminated.  In the case of a professional services business, such as accounting, law, or medicine, you should arrange for existing clients or patients to be referred to a colleague.  If you have an established base of clients or referral community established, your business might be able to be sold to provide for your family.

Sale to a Third Party

Where your business has substantial value outside of your personal participation (including client lists, your business’s reputation, and trademarks), more extensive planning is often necessary.  You may have invested the vast majority of your savings into building and expanding the business, and selling the business may be necessary to provide for your retirement or to take care of your surviving spouse and children in the event of your death.  In order to ensure that the business retains its value for sale if something happens to you, your estate plan should designate an employee or family member to keep the business running long enough to identify a buyer, which usually takes at least six months.  In the absence of a plan, the value of your business could fall dramatically in your absence, resulting in difficulty finding a buyer or a lower sale price.

Sale to a Business Partner

Where a business is owned by more than one person, it is important to plan for what would happen if one of the owners were unable to continue in his or her role due to death or disability, or simply because an owner decided to retire or otherwise leave the business.  Advance planning involving buy-sell agreements and life insurance policies can ensure that the business continues to operate under the remaining owner(s) while providing a fair return for the departing owner or the owner’s family.

A buy-sell agreement is a contract that requires or allows other partners to purchase an exiting or deceased partner’s share of the business, or for the business itself to repurchase that interest.  For most businesses, this agreement is funded with life or disability insurance policies to ensure that there is sufficient liquidity to purchase the exiting partner’s share in either of those events.

Without a buy-sell agreement, you could end up owning the business with your partner’s spouse or children, who may have a very different approach to running the business.  A buy-sell agreement allows you to buy out your partner’s heirs and continue to run the business as you see fit.  On the other hand, if you passed away, your family would likely benefit more from a cash-out than from owning a share of a business they don’t control.

Family Business Succession

The transfer of a business from its founder to a subsequent generation is a critical point in the life cycle of a family business, and a successful transition requires a team of trusted professionals.  Family business succession planning should incorporate not only legal and tax planning, but your vision for the future of the company and the legacy you leave for your loved ones.  Business succession planning often involves difficult decisions about whether your children are the best choice to lead the business, and if so, which one(s). Some children may be involved in the day-to-day operations of the business, while others have little or nothing to do with it.  In the absence of a well-thought-out plan, the business may be transferred to all your children equally – whether or not they have any interest in it.  Allowing a company to be passed to children who have no interest in running it is a sure recipe for disaster.  It is important to create a plan that ensures the continued success of the business while providing for children who may have chosen other career paths.

Estate and gift taxes can create an additional challenge for the owner of a family business.  Because the owner’s assets are often tied up in the business, an estate tax levy can require a sale of all or part of the company to pay the tax authorities.  Careful planning is required to both minimize any estate taxes and ensure that sufficient assets are available to pay any taxes owed without affecting the next generation’s ownership of the company.

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About the Author

Shannon McNulty

Shannon McNulty is the founder of Savvy-Parents.com and a lawyer in New York City who provides legal planning for parents with young children. Shannon received her J.D. from Georgetown University Law Center and her LL.M. in Taxation from NYU School of Law. She has also earned her CERTIFIED FINANCIAL PLANNER(TM) designation. You can learn more about Shannon and her firm at www.cityparentslaw.com.

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