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An article on U.S. tax law by one of our American lawyers.

Business Succession Planning

Leigh Alexandra Basha, Attorney

What will happen to your business if you become disabled or die? Many of the answers to these questions vary considerable depending on the type of entity, the type of assets in the business, tax consequences, and family situation. Both death and disability should be triggering events under a shareholder agreement between the various shareholders or partnership agreement for partners in a partnership. However, if you are a sole shareholder or sole proprietor, then you may have additional business succession concerns.

In any event, if you are doing business in the United States, as a sole proprietor or via a foreign corporation, U.S. corporation, partnership or LLC you should address the following issues:

  1. What will happen to your business if you become disabled?
  2. Who will get your business interest when you die?
  3. Who will carry on your business, if any one?
  4. What are the tax consequences?

(1) If you become disabled, you should have a durable general power of attorney in place appointing a trusted and capable individual to protect your business interest. Further, that agent could elect or appoint someone to run the business during your incapacity. Protecting your ownership interest and running the day to day operation may be best handled by different individuals.

(2) You can dictate who gets your business when you die. This can be done in a will or a revocable living trust. In any event, you should not die intestate (i.e., without a will) in which case state law will determine for you who will get your business interest. Your executor in your will or trustee of your trust is the one who would protect the value of your business interest during the period of estate administration until your heirs receive it.

(3) What happens to the ongoing business when you die? While you may leave the underlying ownership in your business to your family, your family members may not be the most suitable ones to run the business after you are gone. Your options may include selling the business to a third party and distributing the proceeds to your family, having a shareholder buy-sell agreement or partnership/LLC agreement which gives buyout options to the entity itself or co-owners. The buyout can be funded through life insurance on your life or other financing arrangements such as a promissory note secured by the business assets. Or, you can give ownership to your heirs and provide for the hiring of third parties to run the business.

(4) Finally, no planning can be done without examing the various tax consequences. Will you owe estate tax on the value of your business interest? Will an applicable treaty help soften the tax blow? Can you hold your interest in an offshore trust or foreign entity so your death will not trigger estate taxes? All these questions depend on a variety of factors and should be discussed with your attorney and tax advisor.

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