Business succession depends on structure Many times a one-person establishment morphs into a large corporation. In some cases one or more partners are brought on board as the need for additional capital or skill sets arises. The procedure for ensuring the continuation of a business in the event of a principal’s unexpected death or disability depends on the specific structure of the business. Proper planning, however, is the common thread that runs through all business continuation strategies and is essential to any successful transfer of a business, especially if the death of an owner is premature. A sole proprietorship is perhaps the simplest form of business ownership. Typically, little documentation is required to establish a legal sole proprietorship, but when the owner dies the business entity ceases to exist as well. Those administrating the deceased owner’s estate will determine if the assets of the business are to be liquidated or the business will continue as a going concern. Obviously, the success of the existing operation is likely to be highly dependent on the knowledge and skills of those who succeed the deceased owner. As you might guess, sole proprietorships have the highest percentage of succession failures. In cases of sole proprietorship, business succession planning usually includes: • Selecting and training one or more individuals to carry on the business; • Creating a buy-sell agreement to ensure the transaction; • Securing funds sufficient for the successors to purchase the business, often through a life insurance policy purchased specifically for this purpose. A partnership is also a business structure that theoretically ends with the death of an owner. With no pre-existing plan, surviving partners who desire the business to continue must do one of the following: • Adapt to the role the deceased’s spouse will now play as a business partner; • Purchase the interests of the deceased partner and reorganize; or • Liquidate the existing business, pay off the estate of the deceased partner and then reorganize. Far too often, partnerships that have no contingency plan for a partner’s death fail to survive. The pressure of heirs awaiting disposition of the deceased’s share of the business interests, the urgent need to reorganize, lost revenue stemming from the death of a key individual—all can conspire to promote failure or, at best, an extremely difficult transition. As a solution, a buy-out arrangement has proven particularly beneficial to partnerships. In such an arrangement the deceased partner’s heirs agree to sell their inherited share of the business interest to the surviving partner(s). The agreed-to selling price serves to establish the actual value of that interest. The agreement usually allows the surviving partner(s) to reorganize without interference, which can facilitate a smooth transition and uninterrupted operation. To ensure enough cash to fund a buy-out arrangement, surviving partners often simply purchase a life insurance policy specifically structured for this possibility. Corporations, which represent yet another common retail business structure, will be addressed in a future article. Consult your financial planner, attorney, tax consultant or life insurance agent for more information on business continuation plans that incorporate buy-sell, buy-out or other agreement that is most appropriate for your business. AAA Michigan and its agents do not provide legal or tax advice. |
When
a retail business is created, in most cases the needs of the retail business
owner(s) dictate the way the business is structured. While every business
operates in its own unique manner, the original structure often changes
as the company expands and grows.