If you’re a small business owner, you are no doubt aware that the Covid-19 pandemic is driving companies to shutter at alarming rates.
A study published by the Proceedings of the National Academy of Sciences (PNAS) reports that 43 percent of small business had to close temporarily as a result of the virus. Yelp’s Q2 analysis shows that 55 percent of these closures are now permanent. In corroboration, a study from the National Bureau of Economic Research sees the number of active business owners in the US plummet by 3.3 million or 22 percent from February to April 2020—the largest drop on record. Worst of all, experts forecast potential for things to get worse.
These numbers aren’t meant to sew doom and gloom (some studies also give reason for tepid optimism); instead they are meant as a wake-up call. If there were ever a time when small business should follow estate planning and business law practices, it is now.
Three Estate Planning Strategies that Protect Your Business
1. Establish A Succession Plan
A well-designed succession plan ensures your company vision remains front and center. Such a plan identifies and sets the groundwork for developing new leaders while at the same time putting people in place to fulfill business goals. Many small businesses lack a succession plan, putting them at risk of incompetent takeovers and family squabbles that often follow in the wake of an owner’s death.
2. Alleviate Tax Burdens
An estate planning attorney with a business law background can coach you through taking steps now to relieve your beneficiaries of the need to pay hefty taxes on an inherited business. One tried and true approach is to gift family members shares in the business during their lifetime as stocks can be redeemed at a lower tax rate than cash.
3. Institute a Buy-Sell Agreement
This document protects businesses with multiple owners—a frequent characteristic of small enterprises—by ensuring that relatives of the deceased do not gain de facto control of the business. Living owners are given the automatic option to purchase shares in the company left by owners that have passed on, thereby eliminating the risk of unwanted and unproductive meddling.
A will and life insurance are additional tools that offer powerful protections, though the details of how these may work extend beyond the scope of the current article.
As already mentioned, an experienced estate planning attorney with a business law background can explain the advantages and disadvantages of all approaches mentioned here and help you determine which might be best for you.
As the US and world wades further into the unknown and the Covid-19 pandemic continues to grow, fast action is paramount. After all, six months ago nobody would have predicted the catastrophe we are in today and no one knows what the next six months may bring.