When you start a business, you probably aren’t thinking about what will happen if you or another owner leaves the business. Even if years have passed since you launched, you may not have thought about a succession plan. However, it is important to plan for the future so you can maximize the value of the business for yourself, your heirs, and present and subsequent owners. This is true whether you are the one departing the business or a partner or co-owner is leaving. Much of the planning for this can be done by structuring your business to account for future ownership changes.
If you are a sole proprietor, a succession plan is straightforward because you are only taking into consideration your interests. However, partnerships are more complicated because each partner has rights, and potentially, the parties could disagree on what to do when one partner dies or leaves the business. With a corporation, any change to the structure or ownership of the business must consider obligations to shareholders. Additionally, if a business has investors, the succession plan must take into account how they will be paid back, including calculating how that affects the value of each owner’s share if they depart the business.
What Do You Want to Happen to Your Business If an Owner Leaves?
It is important to consider how your business will be structured and operated once you or other owners or officers retire or pass away. Failing to proactively consider and address this question can lead to costly conflicts in the future which could potentially damage your business. This is particularly true with closely held businesses where there might be competition among family members as to who will be in control. Partnerships are more likely to be adversely affected by such conflicts.
Owners/partners should discuss these issues and draft a shareholder or partnership agreement that clearly states:
- How everything will be shared in the event the business is ever sold or divided
- What the rights of each partner are to divest their interest
- How to resolve differences of opinion in managing the business.
The goal is to help ensure that ownership can be changed without dissolving the business.
Have You Coordinated Your Company Documents and Estate Planning?
Company formation documents, shareholder/partnership agreements, and bylaws should allow for owners to leave or change. However, these documents also must be coordinated with the estate planning of the owners. For instance, if you want to pass along your interest in the business to your heirs, your corporate documents may need to be revised so they are in accord with the terms of your trust or will. It is a good idea to consider providing buy-sell provisions or other exit strategies that will give flexibility to your heirs or the remaining owners in how they will manage the business going forward.
This type of planning requires extensive knowledge of business and estate planning strategies. Smith Legacy Law is uniquely positioned to assist in these types of situations, allowing our attorneys to evaluate your business needs now, and prepare for future ownership changes, however you envision it.
Contact us for a consultation today.