Entrepreneurs tend to have strong personalities and as such, are very much in charge of their business operations.
And yet, many small business owners are clueless when it comes to estate planning and they fail to seek advice about their estates until it's too late.
Entrepreneurs often behave as if they will live forever. They can't imagine the business without themselves at the helm. It's an attitude that can fuel their success but also rob their heirs. However, where there's a will, there's a way.
Typically, entrepreneurs consider their businesses a permanent "meal ticket" for their kids and grandkids. Not so. After years of blood, sweat and tears, many small business owners only have the business to show for it. And sometimes, not even that. Consider this sobering statistic: More than one million new ventures are launched each year in the United States. By the end of the inaugural year, only 60 percent are still operating. Within five years, only 20 percent will be in business; by the 10-year mark, only 4 percent. In other words, only 4 out of 100 survive the decade-long demarcation.
That's why, if you currently run a business, you should think about your exit strategy, vis a vis your estate. Entrepreneurs tend to be visionaries who get caught up in the day-to-day details of running their businesses; they care more about creative fulfillment and "empire building" than about such ostensibly mundane matters as estate planning. Don't fall into that trap.
Many small businesspeople and/or their heirs are taken aback when they discover the components that the government counts when calculating their taxable estate. When adding up the value of your estate/small business, be sure to take into account the following:
The potential tax obligations tied to the death of the owner;
Full value of the property of which you are the sole owner;
Half the value of the property you own jointly with your spouse with right of survivorship;
Your share of property owned with others, such as partners and family;
If you live in a community property state, half the value of community property;
The value of proceeds of any insurance policy on your life, provided that you own the policy
Your interest in vested pension and profit-sharing plans;
The value of revocable trust property; and
money due to you by creditors, such as mortgages, rents, and any accounts payable for past products and services rendered.
Also ask yourself: Have you developed a specific plan in your will to provide for your heir(s) if it becomes necessary to liquidate the business after your death?
One more thing to consider is your business structure. If you don't establish a business structure that fits your circumstances right from the start, you could hobble your future estate planning opportunities.
As a general rule, if your business is a start-up or is planning to lose money during its initial phase, consider a Sole Proprietorship for the sheer sake of simplicity. As soon as your firm starts turning at least a small profit, convert to an S-Corporation to take advantage of the pass-through status, the liability protection and the ability to save on Federal Insurance Contribution Act (FICA) taxes, which include contributions to federal Social Security and Medicare program taxes. Once you're firmly in the black, a C-Corporation will address any liability concerns and you can avail yourself of the different tax brackets between your corporation and your personal taxes.
Remember, an overall lower tax burden also creates a business with a greater intrinsic value. That's an important consideration, when planning your estate.
Business structure is a highly complex aspect of entrepreneurship and you need to get it right. Consequently, consult your tax attorney for details. By heeding these basic guidelines, you can make sure that your "golden goose" doesn't turn out to be a cooked one.