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Estate planning for closely held business owners

The vast majority of U.S. businesses are closely held. While there are many legal and financial advantages to various types of closely held business entities, interest in a closely held business can increase the complexity of estate planning. If you are in the process of estate planning and you own a closely held business, here is some information you should consider. 

Designating shares may not be enough

Unfortunately, for estate planning purposes, simply titling the shares or membership interests of a corporation or limited liability company to beneficiaries is likely to be insufficient. In some cases, the company documents of a closely held business won't even allow you to do so. The articles of incorporation or bylaws may have provisions that:

  • Place restrictions on the ability of an owner to transfer interest during life or upon death;
  • Grant the company or an owner the obligation or right to acquire the interest of an outgoing owner;
  • Provide mechanisms to prevent or handle deadlocks between the owners; and
  • Dictate the ability of owners to prevent the dilution of their interest by the issuance of membership interests or additional shares.

Your estate plan must account for agreements between owners

If there are multiple owners for a closely held business, ideally you will have an agreement between all of the owners. When crafting the agreement, you should consider what will happen to stock and other interest after death. The agreement should establish a value for ownership interest upon death, provide estate liquidity, or control or alter the disposition of ownership interest at death.

Type of agreements

An agreement for a closely held business can come in a number of different forms. If your closely held business is a corporation, you can create a restricted stock agreement, a buy-sell agreement, or a stockholder agreement between the owners. An operating agreement is suitable for a closely held business that is a limited liability company. Even though the agreements come in different forms, they all have the same general objective.

Estate planning is already complex, and the process is even more complex for the owners of closely held businesses. For more information about the estate planning process for closely held business owners, don't hesitate to contact an attorney from Connors and Sullivan, Attorneys at Law, PLLC.

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