Business Succession Planning: The Basics
October 9, 2020
When it comes to small businesses, every worker is essential. Most small businesses cannot succeed without the drive and dedication of owners and their families. The sudden loss of key personnel, however, can stop your business in its tracks. If a founder suddenly passes away, COVID-19 impacts essential employees, or a manager leaves to handle personal issues, is your business prepared for their absence?
Professional business succession planning helps business owners prepare for, absorb, and manage the sudden departure or incapacitation of key personnel, including themselves. Unfortunately, most companies do not realize they need succession plans until it’s too late. America’s most successful business owners frequently have multiple succession plans to ensure their businesses thrive after unexpected management changes.
The experienced succession planning lawyers at McClanahan Powers, PLLC understand how quickly the loss of essential workers has devastated small companies in 2020. Stay ahead of the game and protect what you’ve built by connecting with our dedicated Virginia and D.C. business attorneys online or by calling 703-520-1326 today.
Who will take over when or if I am gone?
If you don’t know the answer to this question, it’s probably time to make a business succession plan. Without a plan in place, state law generally determines your successor based on the type of business entity involved and applicable inheritance principles. The following default rules typically apply to business succession when owners have no takeover/buyout plans in place:
- Sole Proprietorship: No one takes over when the sole proprietor passes away. Any business assets and liabilities transfer to the owner’s estate and pass according to the owner’s will or state inheritance laws.
- Partnership: A partner’s death without a clear succession plan or partnership agreement often results in the partnership’s automatic dissolution. The remaining partners must liquidate business assets and distribute them to the absent partner’s estate. They may not generally buy out their partner’s interest or continue the partnership as it existed. This sudden dissolution might result in substantial tax and commercial liability.
- Limited Liability Company (LLC): An owner’s membership interest in a single-member LLC transfers to his/her heirs through a will or intestate laws. While this does not automatically result in the entity’s dissolution, it could inadvertently end the business.
- Professional Limited Liability Company (PLLC): All PLLC owners must maintain an appropriate professional license, i.e., attorney-at-law, CPA, or M.D. As such, management authority or ownership of a PLLC cannot transfer to an unlicensed heir. The Virginia Professional Limited Liability Company Act requires that any remaining licensed owners buy out the former member’s interest to maintain the entity. The incapacitation of all licensed PLLC owners generally results in the entity’s automatic conversion to an LLC.
- Corporation: Stocks transfer with their deceased owners’ estates. As such, a significant stockholder’s sudden death could result in his/her heirs splitting the former owner’s interest and changing the management dynamic.
If these results do not reflect your business and personal interests, consider drafting and executing an incapacitation, buyout, and corporate succession plan with the assistance of one of our experienced business succession attorneys.
Why is succession planning important for small businesses?
Even if all members agree to continue a business, the law often requires the automatic dissolution of certain entities when an owner passes away, leaves a partnership, or loses a professional license. Virginia business succession may also follow default inheritance law, resulting in drastic changes to the corporation’s management and direction. Without proper partnership succession and buyout planning, an entire entity could crumble.
The tax consequences, financial implications, and inheritance disputes associated with an owner’s sudden death or incapacitation might also sink the business. Will contests may leave remaining members unable to make critical business decisions, or the sole remaining member of a PLLC might not have the funds to buy another member manager’s interest. Heirs might also find themselves forced to liquidate individual stocks and membership interests to cover estate taxes and other liabilities associated with an owner’s passing. Additionally, unintended successors seldom have the same passion as an entity’s founding member. Heirs may agree to sell their interest or change the direction of the business itself. To create a lasting entity, you should develop strong succession, buyout, and emergency management plans.
How can a succession planning attorney help?
The law permits most entities to override default succession principles through partnership agreements, articles of organization, estate plans, or other business contracts. These agreements may set forth both a successor and clear guidelines for a business entity’s future management and direction. Further, a succession planning lawyer could structure your ownership interests to pass outside your estate. Placing your stocks in trust, for example, results in the immediate distribution of the business interest to the designed beneficiary upon the occurrence of an event, i.e., retirement or death.
Planning for a key member’s retirement or incapacitation could save your business now and in the future. Business succession lawyers commonly recommend executing contracts addressing the following relevant concerns:
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- Identifying successors, alternates, and the conditions of transfer
- Setting forth clear management guidelines, competencies, training requirements, and governing principles, i.e., requires continued healthcare for all employees
- Directing the sale or dissolution of the entity and preparing for relevant tax consequences
- Placing business interests into a trust to avoid probate and estate disputes
- Developing emergency management and temporary decision-making plans as ownership changes hands or disputes arise
- Creating a backup system containing essential business documents, succession plans, and client contracts accessible by successors or business counsel
- Addressing and securing your retirement plan
- Wills, codicils, trusts, and relevant estate documentation
At McClanahan Powers, PLLC, our dedicated business succession lawyers could help you prepare for retirement and the unforeseeable loss of critical members and owners. They might also help you develop long-term management principles to ensure your company operates according to your core values. From preventing inheritance disputes to ensuring your business’s continuation upon incapacitation, consider speaking with our Virginia and D.C. succession planning and business development attorneys. Call 703-520-1326 to schedule your comprehensive succession needs assessment or connect with our virtual Vienna or Pennsylvania Avenue offices online.