Small businesses are run as a one man show or with few co-owners. There are many transition issues which small business owners have to face. Many a times the next generation is inexperienced and if there is a sudden death of the owner, the continuity of business is in jeopardy. If there is no Will written by the owner, probability of dispute among family members is higher. This could involve legal procedures where cost and time are a big issue. The biggest drawback of legal battles is that the assets become public.
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It thus becomes essential for small business owners to have a well-crafted estate plan to ensure a smooth transition of their business. Given below are four aspects that should be considered to protect one’s business and personal assets:
1. Protecting Estate Through Life Insurance
Legal battles in businesses deprive families the benefits of the assets till the court settles the cases. The suffering of the family can be long lasting when there is no one in the family experienced enough to understand the business. Any repayment of business or personal liabilities can add to the family woes and the life, post owner’s death, can be really tough. Life insurance is one tool which helps in protecting small business families from such situations. In case of any unforeseen event, the money received by the owner’s family helps in meeting their living expenses and repaying the liabilities or at times bearing the legal cost. Ideally, the amount of insurance coverage should cover the total amount of assets one has built and liabilities to be repaid.
2. Creating A Succession Plan
For small business owners, a succession plan is very crucial. The successor needs to be groomed to make him/her understand the business, which may require a considerable amount of time. It may take years before a successor can be given the reins of the business. Many a times the start has to be made by assigning smaller roles and only after sufficient experience, they can be involved in bigger responsibilities. If there is only one successor, the transition will be easy. But if there are more than one, then the role of each successor needs to be created as per their capabilities.
3. Writing A Will or Forming a Trust
Laws of Indian Succession come into play if a Hindu male dies without writing a Will. This situation may be burdensome for the family given the legal process involving multiple hurdles. Whosoever inherits the asset will also have to shoulder liabilities related to it. A Will is an effective document to ensure that the assets can be handed over smoothly to the legal heirs. The Will should contain a detailed description of which asset will go to whom and in what ratio. It should be supported by a list detailing total assets owned by the author and the outstanding liabilities on the date of writing the Will. For small businesses which run as a proprietorship concern, giving reins to multiple heirs is always a difficult decision. Here, formation of a private trust can be beneficial to ensure continuity of the business. The structure of the income distribution by the trustees and the terms of running the business along with utilization of assets can be very well drafted in the trust deed.
4. Provisions For Exit
There are many small businesses where members of the family are co-owners. There should be a provision as to how the business will run if one of the owners die or decide to exit the business. If the share is to be bought by other co-owner then a proper buy-sell agreement should be in place. This agreement will illustrate who can purchase the share and at what price. Also, it will cover the process of implementation of buyout options in the eventuality of death or quitting of business by any co-owner. If the family member of the deceased owner can take over the reins of the business, then this should also be well documented in the agreement. A proper agreement like this ensures that there are no litigations for the share of any co-owner.
The strategy adopted by one business owner may not be viable for all. But any business, big or small, needs an experienced successor and less legal hurdles to ensure it can be continued even when the first owner dies or exits. This can only be achieved if business owners plan ahead and create an estate plan.
The article is written by me and first appeared at www.firstbiz.com
Do you own a small business? What are your concerns on succession plan?
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