April 2014 Dicta
by Sarah R. Duff, The Duff Law Firm
Entrepreneurs often seek legal advice on business formation, taxes, and the like. Besides advising clients on whether an LLC or partnership is a more advantageous choice, one additional consideration for business owners is an estate plan for the business.
Real Reasons to Consider Future Planning for a Business
Why on Earth would any young entrepreneur consider estate planning when starting a new business? Consider this scenario: a small store operates like clockwork with a single owner and one trustworthy store manager and several employees. The store owner has a heart attack and dies, leaving the store manager to run the show. But, assuming the business owner dies intestate and without any type of guidance in the operating agreement, who owns the store? Who will handle payroll or open the store the next day? Assuming the manager wants to buy the store and carry on the business, how would this be paid for? These are questions I recently had to answer in my practice when helping out-of-state clients wind up their son’s small business.
In a nutshell, if the owner was not married and had no children, then the owner’s parents, if they are alive, would inherit a store—not necessarily something older parents are prepared to handle. If the owner is married, a widow or widower could inherit the business. If the store employed several people, a temporary administration may be necessary. This can be an expensive and potentially complicated process. When advising our clients regarding business formation, it is essential that we consider the whole picture and look to the future of the business.
Anticipate the Scenario: Provide a Contingency Plan in Business Formation Documents
The first and best way to insure that your entrepreneur client protects his business is to include any kind of future planning in the business formation documents when starting the business. In addition to designating when meetings will take place and who the officers of the business are, be sure to anticipate who will handle payroll, who will operate the store, and whether the company itself has the authority to appoint someone with those powers in the event of a death of the owner. The documentation may anticipate a kind of chain of command in the event of a death. For instance, a supervisor may be authorized to handle payroll while a high level manager may be authorized to open the store. If the company itself rather than an individual has the power to make these appointments and decisions, then the potential delays and breakdowns in the normal business cycle will most likely be reduced if not eliminated altogether.
Consider Key Person Insurance
In the scenario where one partner dies and one is left running the business, the deceased partner’s family may not necessarily wish to own half a business. The living partner can buy out the business interest from the family if they have cash or an insurance policy to pay for the deceased partner’s interest in the business. A key person insurance plan allows a business partner to take a life insurance policy out on the other business partner in the event of such a situation. Life insurance agents can offer additional and in-depth details of key person insurance policies and the requirements for such. At the Very Least, Draft a Will
At the very least, encourage your client to draft a will to anticipate what should happen to the business in the event of the owner’s death. Or consider placing the business in a trust with a successor trustee who could run the business in the event of the owner’s death.
When forming a business for your client, think beyond the basic documentation and discuss your client’s business plan as a whole. With a complete plan in place, your client will be better able to focus on developing and running the business and will appreciate at attorney who considers the future of the business.
Sarah R. Duff is the managing attorney at The Duff Law Firm in McKinney, Texas. Ms. Duff focuses her practice on estate planning, probate, guardianship, and family law matters.