Death, Taxes, and Business Succession Planning
Written by Christine Waldschmidt, JD, Vice President - Trust Advisor
Starting a business from scratch is one of the most challenging endeavors a person can undertake. The risks taken and sacrifices made to grow that business are significant, but with a little luck they may be rewarded with the opportunity to lead a successful business that creates wealth and opportunity not just for the business owner, but for the community at large. The fire, vision, and work ethic necessary to accomplish this feat are special talents that set the self-made business owner apart from the crowd.
With this intense personal investment of time, effort, and energy, the business naturally becomes a significant part of the business owner’s identity. In fact, data from more than 5 million businesses in the latest Annual Survey of Entrepreneurs (ASE) conducted by the U.S. Census Bureau shows that 60% of business owners put 40 to 60+ hours into the business every week. More than 17% say they spend 60 hours or more working on the business. The vast majority of closely held business owners are intimately involved in the daily operation of the business, and assume responsibility for controlling the direction of the company.
Thinking about giving up control and separating from the business can be very uncomfortable for business owners, and is almost inconceivable for some. We must remember, however, that death and taxes are certain and inevitable. While we cannot control the tax code or the timing of death, we can face the realities and prepare for the inevitable, for the stakes of denial are high.
When a business owner delays creating or implementing a succession plan, they risk the legacy and very survival of their company. Every business owner will tell you that they want their business to grow and flourish after they’re gone, but many fail to take the steps necessary to ensure this successful transition.
The top reasons more than half of small businesses don’t have formal transition/succession plans in place include:
- Fear of losing control. Coming to terms with a plan to transition management and ownership to others can be extremely difficult, as it requires an acknowledgment that you will not always be around to steer the ship. It is an acknowledgment of aging and mortality that you must accept if you want your company to outlast you.
- Tax issues. Complex tax laws that can change over time create a sense of hurdles and quicksand that can feel overwhelming. Paralysis in the face of these issues prevents successful planning.
- Lack of time. Running a business day-to-day often doesn’t leave natural time for business succession planning; you must intentionally carve out time for it.
- Unidentified succession leadership. Running a business without a family member or key employee identified as the next leader might mean selling to an outside party, which can be frightening.
- Fear of retirement. When working 60 hours or more a week is the norm, and when the business is the owner’s identity, it can be unthinkable to do anything else. Stepping away from the business can result in depression, unhappiness, and a loss of personal identity.
Home truth: successful business succession of leadership and ownership does not just magically happen. Responsible business owners invested in the legacy of their businesses must thoughtfully create and enact plans to replace themselves. Start with my recently published article from our Enlighten magazine — it provides eight tips to start the process of business succession planning. Contact us to get started on planning a smooth transition to preserve your living legacy.