Estate Planning for Business Owners
You take a great deal of pride in the company you’ve built, and you may not have plans to leave the business anytime soon. Unfortunately, life can be unpredictable and it’s important to have a plan in place so that your business can have direction in the event that you pass away. Specifically, estate planning for your business can be just as important as personal estate planning. The purpose of business estate planning is to make sure that, in your absence, all your wishes for your business are carried out appropriately. Careful planning can help to minimize taxes owed and even pass on the reins of your company to another entity, if desired.
Not sure where to begin when it comes to estate planning for your business? Your ideal starting point will vary depending on the type of business you have set up.
When your business is a sole proprietorship, you are the sole owner of the company and there is technically no legal distinction between your assets and your business assets. So, what does this mean when it comes to your estate-planning needs? For starters, you’ll want to consider how any remaining business debts should be paid. One of the benefits of a sole proprietorship is that you can use your personal assets to cover these debts, if needed. You should also carefully document your wishes for the business (whether this means passing on the company to a family member or selling the company) in your personal estate plan to make sure they can be carried out properly.
With a C corporation, one of the biggest “hiccups” business owners tend to run into when it comes to estate planning is the possibility of being double taxed if any corporate gifts or ownership of the company are passed on. Specifically, corporate income for the company is taxed at the corporate level, and then is taxed again when income is paid out to individual employees. The good news, however, is that many of these double taxes and other fees can be avoided with a little bit of creative planning on your behalf. Many owners of C corporations, for instance, will use some income to pay off existing business loans, thus making it possible to avoid capital gains taxes. This is something you can set up as part of your estate plan ahead of time, but doing so may require some guidance from an experienced financial advisor or legal team.
For partnerships and limited liability partnerships, the pass-through taxation of a sole proprietorship is combined with the limited asset liability of a corporation. With this in mind, there are some special factors that should be taken into consideration when estate planning for such a business. These issues become especially relevant when dealing with a family-run business, where several members of the family have a stake in the company. One of the most important estate planning considerations you’ll need to consider is who, if anybody, will take over the family business when you pass. For example, if you have three children and two of them will be chosen to take over the business, what will happen to the third child’s shares? Will a buy-out be arranged? How could this affect your family dynamic, as well as tax liabilities? These are all important questions to keep in mind.
If your business is an S corporation, this means that all income, losses, deductions, and other aspects of your business taxes are passed through to your shareholders; from there, taxes are assessed at the individual level for each individual shareholder. This differs from a traditional corporation (or “C” corporation), where taxes must be filed at the personal and corporate level. Taxes matter when going through the process of estate planning for your S corporation, as you’ll want to put plans in place that will minimize your tax liability at the time of your death (and therefore minimize your family’s liability as well). For many owners of S corporations, setting up some sort of “buy out” program is ideal, because it allows your portion of the company’s shares to be taken on by somebody else.
When estate planning for an S corporation, you should also be careful about giving corporate gifts to family members, as these can be subject to very high taxes.
No matter what type of business you have, a carefully thought-out and executed estate plan is a must. If you’re feeling lost when it comes to estate planning for your business, having an experienced attorney on your side can make all the difference. Contact our team at Bunch & Brock Attorneys at Law for the assistance you need in creating your business estate plan. You can reach us by calling (859) 254-5522.