Estate planing considerations for small business owners include:

Minimizing Taxes

If nothing else, one good reason for estate planning is to minimize the amount your estate will owe in taxes. You’ve worked hard to establish your business as a profitable entity. Don’t lose the fruits of your labor to the CRA in taxes.

Owner Dependent Business

Although the business may, in fact, become worthless upon the owner’s death, tax may theoretically be imposed on the value of the business on the day before the owner died. If the owner’s death is unexpected the business may be thriving immediately prior to the owner’s death. To minimize the risk of the surviving family members owing tax on a business that no longer exists, you should document the business plan and the business’ characteristics that act to limit transferability of the business. Your ability to prove the limited value of the business is crucial to avoiding tax on a business that no longer exists.

Sole Proprietors

If you’re a sole proprietor, you’re well aware that your business is not separate from your personal assets – in a sense, your business is you. Probably more than any other type of business organization, you need a clear plan of action for what should take place after you’re gone. What you own personally can be used to cover business debts. Delegate and prepare your successor if you want to pass on the business. If you want to sell the business, do the research that will make selling it easy and inexpensive for your heirs.

Family Run Business

In a family-run enterprise, you may have some heirs who are involved in the business and others who are not – how do you divide your business assets? Many people choose to distribute assets based on a relative’s contribution level. Let’s say two of your children are going to take over the family business. Do you want your third, uninvolved child to have an equal share? Perhaps you want the two involved siblings to buy out the third. Regardless of what you decide, controlling these types of choices is critical. After all, the passing of a family member is hard enough to deal with on its own. Proper estate planning at least allows your business to have a smooth transition.

Buy-Sell Agreements

A buy-sell agreement is a contract between shareholders or partners which establishes a plan for the business in case one of the owners dies or becomes incapacitated. The principal benefit of a buy-sell agreement is that it establishes a sale price for the business and your share of the business. A buy-sell lets you document whether or not you want your partners to buy out your share, if you want to block certain individuals from having a role in the business, or if you want your heirs to sell your portion. Since the business price has been established, family members know they are receiving a fair price.

As any good business plan anticipates the future, a buy-sell agreement is simply another aspect of good business. While creating a buy-sell agreement requires open communication with both your family and your business partners, which can be difficult to achieve, it will establish a solid path for the future, greatly reducing any potential for disaster.

Life Insurance

If the business assets are not liquid, where do partners get the capital to buy out a deceased partner’s shares? Very often, the necessary capital comes from life insurance. This is a common business practice – each partner takes out a life insurance policy which names the other owners as beneficiaries. This strategy gives surviving owners tax-free proceeds to purchase the deceased’s portion of the business from his or her estate.