The Importance of Business Succession Planning

Business succession planning is an important part of operating a business, especially for small-business owners and owners who are nearing retirement. By making business succession arrangements early, owners help make a smooth transition and minimize any negative effects of their departure on the company.

Continuing the Business

The first point to consider in business succession planning is whether the company will continue to operate after the owner departs. Some business owners choose to simply liquidate the assets and close the business when they are no longer involved, while others wish for the company to continue without them. If the owner decides the business should continue, one of the most important decisions in business succession planning is choosing a successor.

Choosing a Successor

A successor is chosen by appointing a family member, employee or other individual to take the owner’s place. Designating a successor in advance will help simplify the transition and set appropriate expectations. In addition, by providing guidance for the continued operation and future leadership of the business, employees can feel secure in their jobs.

Managing Debt

Many business owners have bank loans or lines of credit that help them operate their companies. What many people may not realize is that, upon a business owners’ death or severe disability, lending institutions have the right to call in the debt and force repayment of the loans.

A business succession plan takes outstanding debt and lines of credit into account and provides information on how to manage debt repayment. Particular funds or assets can be selected to repay loans and should be indicated in the business succession plan.

Minimizing Taxes

In addition, a well-crafted business succession plan uses strategies that minimize the tax consequences of any transfers of ownership or control of a company. Because of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Relief Act), there is a two-year window for married couples to give away up to $10 million in gifts ($5 million for unmarried individuals).

Taking advantage of this opportunity to make larger gifts tax-free is another way to reduce a business owner’s potential tax liability. However, it is important to coordinate business gift-giving with any other estate plans a business owner may have.

Also, it is essential to properly document and finalize any business succession plans. If you are a business owner, contact a knowledgeable attorney in your area to create a business succession plan for your company. A lawyer experienced in making business succession plans can help you and your business make a smooth and effective ownership transition.