Business Succession Planning Attorney NYC

A business succession plan helps ensure a business’s long-term prosperity by identifying and developing people to take on key roles when others leave. The plan’s goal is to ensure that the business continues to run smoothly when its key figures retire, leave the business, get sick, or pass away. 

Business succession plans are perceived as contingency plans. They are not meant to be a one-time event. Rather, businesses should reevaluate and update their succession plans frequently to ensure that all its provisions still hold true.

There are several key provisions within succession plans that businesses should be aware of when drafting for the first time:

• Business owner’s goal: The head of the business must first decide how control of the business will work. Considerations include handing the business to a family member or a key employee, or to sell the business to a competitor or strategic partner.
• Buy/sell agreement: If the owner chooses to hand the business in-house, the buy/sell agreement facilitates the transfer of ownership interest from the departing owner to their successor.
• Decision making roles: Once the owner establishes which employees will be changing roles in the business’s future, they will need to determine what rights and responsibilities those employees have. This may include voting rights, ownership interests, veto power, or hiring/firing abilities.
• Training program: The succession plan should include a plan to train the employees that are set to have bigger roles in the future. This is to ensure a smooth transition and the health of the business if change occurs unexpectedly.

The key difference between business succession plans and estate plans is the assets that each strategy deals with. Though both can include provisions regarding the future of a business, an estate plan is more far-reaching than a business succession plan.

Estate plans include all the assets in an individual’s estate including any ownership interests in closely held businesses. These legal documents focus on what happens at an individual’s death, and covers all their assets, both personal and business-related. Key aspects of an estate plan that are not seen in business succession plans are a health care directive, a last will and testament, and power of attorney.

Business-related elements of an estate plan include the ownership interest of the certain individual. Unlike the business-focused succession plan, an estate plan focuses on the individual’s personal stake in the business and how it will be transferred after their death.

Succession plans, on the other hand, focus on the future of the business instead of its individual employees. They are the strategy that will enable the business to continue to operate smoothly and effectively in the future. Provisions like employee training and leadership structure are unique to business succession plans as they do not relate to an individual’s personal assets.

Though the two strategies are different, the business-related aspects within each should be consistent. For instance, the transfer of an individual’s ownership interest in their estate plan should mirror the breakdown of ownership interests in the business succession plan that the individual has a stake in.

Further, an estate plan could ensure that your ownership interest does not pass through probate. Probate can lead to lengthy court proceedings in cases of business interests, which can unnecessarily delay the succession process outlined in the succession plan. Making these strategies consistent ensures both the sustained health of your individual assets and your business.

Small, family-run businesses are among those that business succession plans are most important. Ensuring that a structured plan is in place for the future is crucial for businesses that do not have the resources of larger companies. Further, family-run businesses have employees that are familiar with each other on a personal level, so their strategic plans should reflect how those relationships are treated within the business. Here are some common succession plans for family businesses:

• Buy/Sell Agreements: Key figures within the business can agree to buy out each other’s ownership interest upon a partner’s retirement, disability, or death in a buy/sell agreement. These “triggering” events may be unexpected, so having a pre-determined, legally enforceable transfer of a partner’s stake in the business is a very safe and stable way to ensure that the business continues to run smoothly under any circumstance.
• Family Limited Liability Companies (LLC): Family LLCs shield a family’s assets from creditors while ensuring a smoother transfer of wealth from one generation to the next. Set up as a regular LLC, this form of business venture can give business partners estate and gift tax advantages when passing the business down to the next generation. Participants in a family LLC must related to one another by blood, marriage or through adoption. Further, the LLC must have an operating agreement that spells out the ownership interests of each member, transfer rights, decision-making, and day-to-day operations of the business.
• Stock Purchase Agreements: When transferring roles in a family-run business, there may be stocks involved in the transfer. Stock purchase agreements outline the breakdown of ownership interests in the business’s stock when a triggering event occurs.

There are several tax considerations for your business while developing a succession plan. Further, it depends on the structure of your business for how it is currently taxed and will be taxed in the future. For example, partnerships are taxed once, while C Corporations are taxed twice for profits. The structure of your business will impact how income is taxed, and depending on the entity, who in the business will be taxed.

Succession plans should include a gift and estate tax strategy. Minimizing estate taxes in the change of ownership interests can be done with a gradual transfer. Handing the business over gradually allows a business to leverage the annual gift tax exclusion and lifetime gift tax exemption. Both of these can decrease the business’s overall estate tax bill.

Another tax consideration is the generation-skipping transfer tax (GST). This is a federal tax on the transfer of assets or property to individuals that are more than one generation below the transferor. If the business succession plan gives stake in the company to someone other than the succeeding generation, the GST tax would be implicated, and businesses should plan their succession plan accordingly.