Time is flying by in 2021, and is that really such a bad thing? If you’re a small business owner, you know that the past year-and-a-half has been difficult. Though there are government programs that have helped keep small businesses afloat, things are not completely back to normal.
Luckily, there are various legal ways you can protect your business assets, even in these troubled times. Use this guide as a reflection tool. It’s almost mid-year—how are things looking for your business? What steps have you taken to protect what you have built?
What the Surveys Are Saying
Bill.com conducted a survey of small business owners, asking them about their forecast for 2021. The survey found that, while a majority of SBOs are optimistic, they are also making changes in how they run their businesses. 75% are introducing new products and methods of conducting business as we enter the second year of COVID-19.
New innovation is a necessity for an SBO. However, it is, obviously, not the only necessity. Estate plans are a must-have. In the next section, we’ll discuss several key components of small business estate planning.
Estate Planning for Your Small Business
If you’re a small business owner, you probably have a million things to focus on each day. It’s imperative to carve out time in your schedule, however busy, to create an estate plan. Around one-third of small business owners have no estate plan (Fundera), which means they have no written-down plan for succession.
A will and power of attorney are two basic must-have documents for any SBO. A will states how you want your business to be distributed (succeeded, liquidated, sold, etc.) after you die. A power of attorney will handle financial and business transactions, such as paying bills, handling insurance claims, and such, if you are unable to do so yourself.
This is where it is especially important to hire an attorney, as tax laws are always in flux. Estate planning attorneys might be able to help minimize estate taxes, which are an issue for estates exceeding a certain amount of money (currently, $11.18 million). Other tax considerations include withdrawal of 401(K)s, IRAs, and/or other retirement accounts.
Buy-sell agreements are optional and really only apply to businesses that have multiple owners. Buy-sell agreements are legal documents that specify who can purchase an owner’s share of the business. BSAs also specify the conditions and price of the sale. This document lays out what should happen if one of the owners dies, retires, or becomes disabled.
Insurance is one of the most vital tools an SBO can possess. While business insurance is obvious, life and disability are two other insurance policies you should think about. Life insurance coverage will provide your family (or another named beneficiary, like your business) with income when you die. The insurance can also guarantee income to your business, keeping the company operating when you are gone.
Disability insurance will provide coverage in the event of a short- or long-term disability. Again, it will give your business much-needed cash flow. You can purchase these policies with your family and/or business as the beneficiary.
Succession planning specifies exactly how you, your company, and family will prepare for the ownership transition. Succession plans are written documents that lay out what will happen to your company when you die. They include much of the same information as business plans, just with an added section on succession. You’ll want to keep the succession plan document and will consistent with one another, so as to prevent expensive litigation or court battles down the line.
Family-owned businesses often face a host of issues that other small businesses don’t. For example, one child of a business owner might want to take over the business, while the other doesn’t. There also might be concerns about keeping family business assets within the bloodline. An estate planning attorney, as well as a financial advisor, will be able to help you find legal pathways to structuring your business estate plan in the way that best fits you and your family.
Updating the Plan
You’ll want to update your estate plan regularly. When you experience major life or business changes, or when tax laws (both federal and state) change, you’ll want to take another look at your documents.
This guide isn’t the be-all, end-all of protecting your business, but it should hopefully give you a chance to reflect on what you have done and have yet to do for your company. Contact an estate planning attorney to learn more and visit our website for details on how we can help.