Business Succession Planning
- Succession planning for businesses
- Appointing a new Trustee
- Shareholder and partnership agreements
- Planning your exit strategy
You do not actually own the property held in a trust or owned by a company. You may be a trustee and beneficiary of a trust or a shareholder and director of a company but you do not directly own the assets held in these structures. You cannot leave your interest in a trust to anyone but if the trust deeds allow, as the appointor or principal of a trust you can pass the control of the trust to the person you choose and if you are a shareholder, you can leave your shares to the right person who can take over and control the family company or business.
BUSINESS SUCCESSION PLANNING
When making plans for your business as much thought should be given to business succession planning as you give to the organisation and financing of your business.
Who will run the family business after you die? What will become of your interest in that partnership? How do you protect those interests?
How you will deal with these factors will always depend on the circumstances including the structure, financing and ownership of the business and its assets. It should always be remembered however, that ownership and control is not necessarily the same thing.
Although your family may retain an ownership interest in the family business without control over the operations of the business, they may not derive any income and will only benefit if the business is eventually sold.
APPOINTING A NEW TRUSTEE
Many small family businesses are operated within a trust structure. The assets of the business are held within a trust and the trustees operate the business. The advantages of this business structure are asset protection and the ability to distribute income in a tax effective way.
The Principal or the Appointor of the trust has the power to appoint the trustee and in family discretionary trusts, is generally a trustee of the trust as well as a beneficiary. Income received by the trust is distributed to beneficiaries at the discretion of the trustee.
Although the trustee has legal ownership and control of the assets because it is the appointor who appoints the trustee, the ultimate control of the trust rests in the person who holds that power of appointment.
When making your will, you should expressly appoint the person you want to be in control of the trust. By giving that person the power to appoint the new trustee, they may remove and replace the trustee as required.
Shareholder and Partnership Agreements
Many small businesses are operated in small proprietary company or partnership structures.
Partnerships are notorious for the difficulties which arise when one partner dies, retires or otherwise wishes to exit the business. Problems may also arise if a partner is involved in a matrimonial property settlement. Small proprietary companies are not exempt from these problems as often they are nothing more than incorporated partnerships where the ownership and control of the company resides in the persons who operate the business.
As stated above, ownership and control is not the same thing. You may leave your shares in your company to your family but that may not give them control of the business or the right to receive income from the business. Your family may actually have to wait until the business is sold before they will receive any benefit as it is extremely difficult to sell shares in such small entities.
In a partnership, the transfer of ownership of the partnership assets to someone not involved in the operation of the business can cause problems for the continuing partner.
In both situations, it is essential that the shareholders of the company and partners in a partnership have an agreement on how they will deal with these situations.
Shareholders and partnership agreements may be used to provide the method by which shares and partnership interests may be valued and purchased by the continuing shareholder or partner. Pre-emptive rights to purchase those interests not only give the continuing shareholder or partner some certainty about the ongoing operation of the business but ensure that your interest in the business is passed to the right people.
Planning your exit Strategy
You should seek advice from your accountant and solicitor not only to ensure that you have a succession plan in place but also an exit strategy. Staying too long in business can be detrimental to both your physical and mental health and to your relationships. You should always have a plan to take the money and run hopefully to greener pastures. Remember you are not in business to work in the business but to manage it, grow it and move on when the time is right. But that is the subject of another blog.
This article contains general advice only and may not apply to your particular circumstances. Please contact us if you require more detailed advice