Whether you are a sole proprietor or a partner in a small business venture, you need to include a succession plan in your overall estate plan. Failing to do so could result in some very negative consequences if something were to happen to you. To illustrate the point, imagine the following scenarios:
- You own a sole proprietorship that you plan to pass on to your children when you die but you are only in your 30s so you figure you have plenty of time to worry about that. Unfortunately, you are involved in a catastrophic car accident and become incapacitated. No one is legally authorized to handle the financial aspect of your business or the day to day of the business. By the time your loved ones have sought court approval to do so, the business has fallen apart and cannot be saved.
- You and two other people formed a partnership for your business venture. You are married with two young children to support. You die unexpectedly. Legally, your interest in the business goes to your husband; however, he knows nothing about the business. Your partners would like to buy out your interest, but do not have the capital to do so. Again, the business flounders and fails.
Both of these scenarios could have been prevented by creating a succession plan ahead of time. Your sole proprietorship could keep running regardless of your incapacity had you simply executed some important estate planning documents ahead of time. Likewise, the partnership could have survived your death and your family would have been provided for had you entered into a buy-sell agreement that was funded by a life insurance policy.
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