Burner Prudenti: Business Succession Planning: Protecting What You’ve Built

Business Succession Planning: Protecting What You’ve Built

Q: I own a business that depends heavily on me. What will happen to the business if I die or become unable to manage it?

A: Business owners spend years building their companies, but too often they fail to plan for what happens when they are no longer able to run the business. Death or incapacity without a proper succession plan can create immediate uncertainty over who has authority to act, who will manage the business, how employees and bills will be handled, and ultimately, who will own the business.

As we recognize the contributions of workers and business owners this Labor Day, it is an appropriate time to consider whether your estate plan and your business documents protect the business you worked so hard to build.

The first step in business succession planning is understanding how the business is legally structured. A sole proprietorship, limited liability company, partnership and corporation each present different succession issues that should be addressed in their respective entity agreements. Properly drafted business documents should address what happens at the death or incapacity of an owner; rights to transfer, purchase, or otherwise handle an owner’s interest; business valuations; buyouts; management transition, and more. These documents are not simply administrative paperwork. They are the foundation of a business succession plan.

The business documents and the owner’s estate plan must also be coordinated to ensure the business owner’s wishes can be carried out under both plans. A business owner should not assume that leaving the business interest to a child or other family member in a will or trust automatically gives that person the ability to run the company. Ownership and management are separate issues. A beneficiary can inherit the economic value of a business without having the authority, experience, professional license, or other qualifications necessary to operate it. Additionally, if the entity agreement prohibits who may become a member or shareholder, requires the consent of the other owners, or grants a party a right of first refusal, the governing document controls. On the other hand, if the entity agreement is silent as to certain issues, a will, trust, or power of attorney can supplement the terms and provide an important second layer of protection.

The estate plan becomes particularly important at death. If the ownership interest is held in the owner’s individual name and passes under a will, the interest generally becomes part of the probate estate. The Executor must first obtain authority from the Surrogate’s Court before exercising the rights associated with the estate. For a business that depends on its owner, probate can create a dangerous gap between the owner’s death and the appointment of someone with legal authority to act. During this period, the business must operate. Employees must get paid, customers and vendors need answers, contracts require signatures, and other financial obligations must be met. Important business decisions cannot simply be put on hold while the family waits for the estate to be administered. Will contests and family disagreements can further delay this process, making probate less than ideal for a business.

If there is no will in place, the family will go through an intestate proceeding instead of a probate proceeding, and the laws of intestacy, which are the default laws in the state of New York when there is no will, will govern. These laws tend to be unfavorable to the family. Alternatively, by assigning business interests to a trust during the owner’s lifetime, the probate or intestate process is avoided, and the business can be managed immediately at death, subject to the terms of the entity documents. Business succession planning cannot be accomplished through a single document. The owner’s estate planning documents must work together with the company’s governing documents. Planning in advance can help preserve the business and provide for an orderly transition at the owner’s death.

— Alma Muharemovic, Esq.

Alma Muharemovic, Esq. is an Associate Attorney at Burner Prudenti Law, P.C. focusing her practice areas on Estate Planning. Burner Prudenti Law, P.C. serves clients from New York City to the east end of Long Island with offices located in East Setauket, Westhampton Beach, Manhattan and East Hampton. Circular 230 Disclosure Notice: To ensure compliance with Treasury Dept rules governing tax practice, we inform you that any advice contained herein (including in any attachment) (1) was not written and is not intended to be used, for the purpose of avoiding any federal tax penalty that may be imposed on the taxpayer, and (2) may not be used in connection with promoting, marketing or recommending to another person any transaction or matter addressed herein.