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The Importance of Estate Planning for Small Business Owners – Part 1

How Does Owning a Business Impact the Estate Planning Process?

If you are a business owner in New Hampshire, there are a few significant ways that your estate planning process may differ from the average resident. For one, it brings a greater sense of urgency to implementing a plan. Most owners, after establishing their business, will realize that if something happens to them, they need a plan of action on how this may impact their organization. This is typically when estate planning, in general, will come into focus for these individuals. Having said that, it is important to note that planning your estate and doing estate planning for your business are not quite the same. Confused? Let’s clarify how these actions impact succession planning for your business.

If you are someone with a small business that you have built up over time and want to protect, then your ownership absolutely can be incorporated into a will or a trust. Doing so will help to ensure that the value of the business is ultimately going to the right place. This does not, however, address the matter of who would take over control of the business if something happened in an untimely or unplanned fashion. Sometimes, these topics can be built into estate planning documents, but typically they are handled by a separate agreement such as a buy-sell agreement or similar.

Of course, this all varies greatly depending on the size and complexity of your business. One scenario I’ve seen that is often the single greatest stumbling block for successful small business owners in New Hampshire is not having a sense of who would take control of the business after they are gone. Oftentimes, as my clients age, the matter of transferring ownership becomes increasingly important because it helps to ensure the value of the business is being transferred to your heirs as well as establishing an appropriate succession plan for the organization.

In New Hampshire a “Small Business” can range anywhere from one to 500 employees – how does the process vary?

Most of the small businesses that my firm helps are really small – most ranging from two to seven employees. I would say that is typical for estate planners that are not necessarily business specialists but, when a business is larger or has more employees, there is a greater likelihood that the business owner would have been advised to set up not as a sole proprietorship, partnership, or an LLC, but rather some type of corporation, whether that be an S Corporation or a C Corporation. From my perspective as an estate planner, that is where the transition begins from a relatively simple plan to something a bit more complicated.

This is not to say that it is impossible by any means, it just makes the conversation of ownership less about an individual and more about something like a trust. For example: if someone has an S Corporation, that S Corporation will have particular rules that don’t always play nicely with trust planning. Additionally, for some of our larger partnership or LLC-type entities that have multiple stakeholders, there will typically be an operating agreement that governs how the business will run, how the responsibilities will be delegated, and how the economic interests will flow among those stakeholders.

What I have found, especially with older operating or partnership agreements, is that they will often prohibit an individual owner from transferring their ability to assign their interest without the permission of all partners. This is important because I will often recommend to my clients to assign their interest in the business over to a trust so that it can avoid probate and keep your planning consistent with your wishes. There are plenty of other examples, especially with larger businesses, that can add complexity to the documents that you’re dealing with in the estate planning process.