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Corporate, Estates & Wills & Trusts

Crucial for business owners to give thought to succession plan

It is never too early to have a succession plan in place that ensures the continuity or smooth transfer of a business and its assets in the event of the owner’s death — especially if an individual’s family is dependent on the company’s income, Vancouver corporate lawyer Jonathan Reilly tells AdvocateDaily.com.

While many owners may consider their insurance needs or what succession planning might look like in the future — selling the business or passing it on to children via a living transfer at retirement, for example — Reilly, founder of English Bay Law Corporation, says owners need to put the same thought into what happens if they pass away suddenly. They should also revisit this plan as their business and personal circumstances change.

“Obviously, how you think about it when you're young and healthy may differ from when you're established. And how big the business is will also affect how you look at it.

"Especially if your family is dependent on the company — if you're the primary earner or significant contributor — then it's something you should frequently give thought to,” says Reilly, whose firm practises real estate, corporate/commercial and wills and estates law.

“If your family is dependent on the income from the business and the company is dependent on you, and something happens to you, all of a sudden your family has no money,” he adds.

For business owners looking to implement a succession strategy in the event of their death, the first step is to work with a lawyer to understand the organization's assets. The lawyer's role in the process will then be to put the tools in place for ownership to move smoothly and relatively quickly to the intended parties without undue tax or challenge.

“Once you have an idea of what the business is, then you can turn your mind to what kind of protections you will need — is it mostly intellectual property or goodwill or machinery and equipment? How many employees are there? How is it all owned? Is it incorporated and if so, who are the shareholders? Is it unincorporated? And maybe the client should consider incorporating it,” says Reilly.

After the lawyer and client have gained an understanding of the company and what it owns, they can then discuss what the client wants to do with the business if they die.

“Do they want it sold or for the family to continue to run it? Do they have no plans for it at all — they just want to wrap it up or maybe it's only possible to wrap it up. What expectations does the client have for the business after they pass? That will then draw very quickly into who is going to run it, not just on a day-to-day level, but also at the policy level, at the director level.”

While the will is important in the succession process, says Reilly, if the business is incorporated, the governing documents of the company can also be crucial.

“The governing documents of the company tell us not only who is eligible to be a director or a shareholder, but how those positions are filled,” he says.

Lawyers can put provisions in place in the governing documents of the company that will affect who and how the company is governed. They can also determine whether business owners should take the next step of having an estate planning arrangement for the company that is separate from the client’s individual estate plan.

Continuity of the business, he says, may not be possible depending on the type of company.

“If you're a doctor and you die, chances are your spouse or your child is not going to be able to step in your shoes — it's a personal services business. If you have a business that you manage but it largely earns money on the efforts of other people, then that's a different circumstance and requires a specific kind of planning.

"Even if you're in a personal services business, there may be goodwill that has some value, but it will evaporate quickly if no plan is in place to protect it.”

The plan will also depend on other factors, such as the age of the owner’s children and their interest in being involved in the company.

"With young families, people’s main concern is about who will take care of their children but as they and the business mature, the question becomes ‘can the children take care of the business, are they interested in taking that role?'

Parents and children don’t always agree on that. The parent may have sunk their life into the business and it may be quite lucrative or at least provide a good income and the kids may have no interest in running it.”

And ultimately, for businesses with partners or multiple shareholders, the succession planning process will prove to be more complex, says Reilly.

“At that point, you're not just considering the family and how they may react to your plans. You also have to think about your business partners and what the requirements of the organization are. There may be partnership or shareholder agreements that have requirements,” he says.

Each partner would have their own estate plan, but the business would be a nexus where all those plans touch. Many partnership agreements restrict who can be admitted to the partnership.

“So, just because your son or your daughter is interested in the business and capable, you can't assume that the other partners will feel the same way,” says Reilly.

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