As a business owner, you’re busy. Every day you’re worried about cash flow, keeping your customers happy, and managing your employees. In the rare moment that you have “free time,” the last thing on your mind is planning to one day hand the business over to someone else. But without proper business succession planning, the business you’ve worked so hard to build may fall apart and dissolve into nothing.
Whether you are just starting your business or are nearing retirement age, business succession planning will help protect yourself, your family, and your business.
Sometimes the choice of successor is clear: your son or daughter has been working with you for years, you trust him or her implicitly, and have been grooming this person to succeed you in running the business.
Other times, you may need to choose between business partners, family members, or both as a business successor. Each person will have strengths and weaknesses that you must evaluate. You will also need to consider whether they want to take the business over from you.
A North Dakota business lawyer can help you assess who will be best suited to succeed you in your business, and prepare a buy-sell agreement that controls how business ownership will be transferred.
A buy-sell agreement can specify:
If you organized your business as a Partnership, a buy-sell agreement is often the best way to specify how ownership will transfer. A common scenario involves business partners or the Partnership purchasing life insurance policies naming their partners as beneficiaries. In the event that one business partner dies, the remaining partners use the insurance death benefit to buy out the deceased partner’s ownership interest.
If your business was set up as a Limited Liability Company (LLC), each member owns a percentage of the company and ownership will transfer in much the same way as in a partnership.
In a C-Corporation, ownership interest is based on the number of shares owned. If one owner wants to leave the business, the remaining owners will need to buy out that owner’s shares. The remaining owners record a long-term capital gain and will pay taxes on the increase value of those shares.
If your business is an S-Corporation, shares are also transferred but income and expenses are passed through to the owners and are not taxed at the corporate level.
Regardless of the type of entity you chose when you organized your business, you can use a buy-sell agreement for business succession planning and to control how ownership in the business will be transferred.
It is also beneficial to establish the value of the business, or to include a provision in the buy-sell agreement that specifies how the business will be valued. Valuing a business often involves an appraisal by a CPA or other business valuation professional. Alternatively, the business owners can agree on the value of their respective interests.
If you own a business and have questions about business succession planning, or if you are starting a business and want to put a business succession plan in place before you start, North Dakota business lawyer Leslie Thielen can help move you forward.
We invite you to contact the North Dakota business lawyers at Fremstad Law by calling (701) 478-7620.
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