Often, for many small businesses, the owner is also a key cog in the operation of that business. This makes it imperative to plan for what happens when you are no longer in a position to run things, also referred to as succession planning. Succession planning typically has two primary parts: 1) a plan within your business that clarifies who will take over your role and be responsible for decisions; and 2) estate planning documents that clarify who is able to act as the owner of the business in the event that you are incapacitated or have passed away. We will primarily explore the estate planning side of succession planning, but the two operate in tandem. For the estate planning side, there are two key documents to be aware of: a will and a power of attorney (although other documents may be necessary depending on specific circumstances).
The Essential Role of a Will
A will is in some ways an obvious part of a succession plan. If you pass, your business needs to go to someone. However, administering an estate can be a lengthy process and if your executor is not versed in your business, he or she may be unable to properly manage it in the interim. As such, your choice of executor is crucial for ensuring the continued smooth operation of your business. In some situations, it can be prudent for business owners to draft two wills, one for their personal assets and one for their business. This can also have tax benefits and allows a specific individual, even a professional trust company, who is more suited to manage the needs of the business, to be appointed as executor.
Granting Decision Making Power
A power of attorney is a legal document that grants someone else the authority to make financial and business decisions on your behalf. In a business context, this means that if you, the business owner, become unable to make decisions due to illness, incapacity, or absence, the appointed person can step in and ensure the continuity of business operations.
If you have a larger business, you may already have a second or other qualified individual who is capable of managing the business in your absence. However, they won’t be able to manage anything requiring the owner’s sign off if you are rendered temporarily or permanently incapacitated. Without a power of attorney in place, crucial business decisions could be delayed, leading to operational disruptions, financial losses, and potentially harming your business’s reputation.
Benefits of Appointing an Attorney
There are a number of other advantages in appointing an attorney to manage either your affairs or your business in particular (many of these also apply to your executor):
Managing Complex Business Matters
By appointing an agent through a power of attorney, you can ensure that someone with the necessary knowledge and skills can handle intricate business matters when you’re unable to do so.
Access to Financial Accounts
A power of attorney can grant your agent access to your business’s financial accounts. This access can be essential for managing cash flow, paying bills, and maintaining financial stability, particularly if your absence is prolonged.
Legal Transactions
Your business might need to enter into legal agreements or contracts even when you’re unavailable. A power of attorney gives your agent the authority to sign contracts on your behalf, ensuring that your business commitments are met.
Customization of Powers
A power of attorney can be tailored to grant specific powers to the agent. For instance, you can limit their authority to financial matters or expand it to include operational decisions. This customization ensures that your wishes are followed while providing flexibility.
Protection Against Mismanagement
By appointing a responsible and trustworthy agent, you reduce the risk of your business falling into mismanagement or facing internal conflicts if decision-making is left unclear during your absence.
Peace of Mind
Knowing that your business affairs are in capable hands, even when you can’t personally attend to them, can provide peace of mind for you as a business owner. It allows you to focus on your recovery or other personal matters without worrying about your business’s well-being.
Avoiding Legal Complications
Without a power of attorney, there might be confusion and legal challenges if someone needs to step in and make decisions on your behalf. This could lead to disputes and court interventions, which are time-consuming and costly.
Preventing Business Disruption
A well-drafted power of attorney can help prevent disruption to the business by providing clear instructions on how your business should be managed during your absence or incapacity.
Safeguard Your Business’s Future
As a business owner, forming a succession plan, including appropriate estate planning documents, allows you to be proactive to ensure the smooth functioning of your business in the event of an unexpected emergency. Consulting with legal professionals is recommended to ensure that both the will and the power of attorney documents are properly drafted, tailored to your business’s needs, and compliant with relevant laws. Succession planning is not just about securing your legacy; it’s about safeguarding your business’s future.
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Disclaimer: This blog post is for informational purposes only and should not be construed as financial or legal advice. Consult with qualified professionals to create a personalized estate plan suitable for your specific circumstances.
