According to a study through Family Enterprise, USA, family owned businesses contribute 54 percent of the United States GDP and employ 59 percent of the American workforce. In fact, according to the United States Census Bureau, family businesses account for 90 percent of businesses in our nation.
Family-owned businesses clearly make up a significant part of our economy. However, business owners who may excel at handling the day to day responsibilities of management too often fail to consider the integration of business and estate planning.
Business owners must be prepared to consider possible retirement, illness or incapacity and the ultimate reality of death. Depending on the type of business and the number of members or partners, possible outcomes could vary significantly. For example, a single member company that operates a skilled trade likely will have a much different disability plan from a multi-member company that operates a retail store.
Although both may be family businesses, one is tied to a specific individual and a specific service, while the other easily can be transferred.
Family businesses and other small business owners realistically should consider several factors when planning.
First, business owners should consider whether the business could continue to operate without the owner. If the business cannot operate without the owner, a plan should be in place for short-term and long-term absences. Consider the ability of the business to cover expenses, and for what time period, and create a plan for the substitution of services, as well as for the ultimate closure and distribution of the company’s assets.
If the business can operate without the owner or one of the owners, consider how the absence of the individual would affect the overall business, and how any additional expenses caused by the absence would be covered.
Second, business owners must consider the needs of those dependent upon him or her. Many business owners desire for a spouse to continue to receive a lifetime income if the business owner predeceases the spouse. However, that plan should be clearly determined in advance. Particularly in a partnership, every partner must share the same understanding of any spousal rights, including whether the spouse will be entitled to income alone or whether the spouse will have any control over how the business will be run.
While the idea of simply passing on business interests may seem appealing from an income only perspective, the new roles of everyone involved could quickly create difficulties.
Third, those in business should be realistic about the role that beneficiaries likely will play in the business after the principal is gone. Small businesses have a layer of sentimentality that is difficult to separate from the purely commercial enterprise and owners often have a hard time imagining that their children may not want to continue the business.
Families in business should be willing to have open discussions with beneficiaries about whether the beneficiary is logistically able to carry on the business and whether the beneficiary has any desire to do so. By gauging interest and ability, owners can prepare for a possible transfer of ownership or a total liquidation.
Family businesses should be structured properly with carefully drafted Operating Agreements and transitional planning in place. And every business interest must be reflected in an individually crafted estate plan. Including business planning in an estate plan can ensure that both the business and dependents are protected.
Cynthia Griffin is an elder law and estate planning attorney at Burnett and Griffin PLLC in Elizabethtown. She can be reached at [email protected]