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Considerations in Business Succession Planning

Unlike corporations, which are typically owned by a large group of stockholders, small businesses must plan for what happens after the owner or owners of the company retires or passes away. These small businesses in California, typically organized as sole proprietorships, partnerships, or limited liability companies, must decide how their business succession plans fit into their overall estate planning. Then, after consulting with an attorney experienced in business law and estate planning, the small business owner should develop a comprehensive business succession plan to ensure that his or her wishes will be carried out while paying the least amount of taxes legally possible.

How Business Succession Planning Fits into an Overall Estate Plan

While most small businesses believe that business succession is a simple matter, where one person takes over the company after a current owner passes away, retires, or otherwise steps away from the company, the reality is much more nuanced. From a practical standpoint, problems often arise at many stages of the business succession process. In some situations, heirs or longtime employees may feel entitled to a larger role in the company, or perhaps even ownership of the business. In other situations, there may be multiple owners who are either unprepared or untrained to fulfill their new responsibilities. In either situation, the potential discord and lack of preparation could quickly imperil a small business.

For these reasons, it is best to speak with an attorney to create a full, comprehensive business succession plan. By proactively responding to the different scenarios that may occur in the years or decades down the road, the business owner will be able to provide stability to the business in what could otherwise be a fraught time. Not only is a business succession plan beneficial for employees, who should have realistic expectations and proper training for any new roles, a solid business succession plan is also necessary to maintain customer loyalty by continuing to provide the same level of professionalism and consistency they expect from your company.

Business Succession and Taxes

After developing a response to the different scenarios that may occur as the business grows and develops, the business owner should also develop the most tax-efficient way to implement the business succession plan. For a business owner who has made no business succession plan at all, an untimely death could result in a large tax bill, especially if the business owner’s estate, which includes the business and any other assets, is valued at over $11.2 million. In this case, the “estate tax” will apply and any amount over 11.2 million will be taxed at a 40% tax rate. For a small business valued at $30 million, this could mean a tax bill of $752,000 – a number that could possibly bankrupt a small business.

Popular ways to avoid the estate tax include establishing a Grantor Retained Annuity Trust (GRAT) or a Grantor Retained Unity Trust (GRUT). These two irrevocable trust funds allow a business owner to transfer the business and its assets into a trust fund in exchange for a fixed payment for a period of time set by the owner. While the business owner remains in control during that period of time, when the period of time ends, then the trust beneficiaries will own the business and assets in the trust fund. Depending on when the owner dies, this can also reduce the tax burden on the beneficiaries and the estate itself. Furthermore, these two types of trust funds also have the benefit or avoiding probate, an often lengthy and expensive affair, especially when large amounts of money are at stake.

If you own a business in California it is important that you plan ahead for succession. Talking to an attorney familiar with business models as well as estate can not only save money it can ensure that the business is able to continue operating in the event of an unforeseen event.

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