Small business owners need to prioritize estate planning. In my opinion it is one of the most important; yet overlooked parts of the estate planning process. The urgency to get employees paid on time and the uncertainty of their job security is a critical issue. I hypothesize that when you own and operate a small business, especially one with few employees, you have no idea the nightmare it can create for your executor.
It’s difficult to recall in great detail the weeks following my father's funeral. It was by far the most stressful and challenging part of my executorship. While my father's overall estate plan was organized, his business' succession plan was not. As the executor of a small business owner’s estate, I did not have the luxury of grieving.The pressure to get my father's employees paid on time and to pay the company’s monthly expenses fell completely on my shoulders.
HB Parking's Operating Agreement declared that the business ceased to exist upon my father’s death. Though I had no legal obligation to continue operating the business, my father had five employees who had worked for him for over 20 years. Their loyalty to my father required me to pay them on time and to ensure their future job employment. These people were like family to my father. I couldn't say to them, “I’m sorry, I’m grieving. I can’t help you right now.” On the contrary, I had to figure out how I was going to come up with over $20,000 until I was granted access to the LLC bank accounts by the Commissioner of Accounts. I spent two weeks working alongside my father’s bookkeeper digging information out of quickbooks, looking through my father’s folders, and piecing together a picture of a business that he had mostly handled on his own. Within a month of his passing, I handed over the company to the employees, worked with my accountant to get him as much information as possible, and paid off all outstanding balances so that the company was in a good position moving forward.
What Would Have Been Helpful For Me As The Executor
I am neither a lawyer nor an accountant. It is important to consult professionals as you begin your estate planning process. However, I can offer insight based on my own experience. If the thought of your child, life partner, sibling, or friend having to operate your business the day after your death makes you uncomfortable then I highly encourage you to prioritize planning as soon as possible.
Operating Agreement
A clear operating agreement with succession wishes spelled out is important. One of the first headaches that I experienced was that the operating agreement stated that “the business ceases upon death”. This created confusion at the bank because the LLC was no longer in existence. It was unclear how to proceed in giving me access to the LLC bank accounts even with my stamp of approval from the Commissioner’s office. Additionally, it created a lot of guesswork on my part as to how my father would have wanted his employees to be taken care of after his death.
Immediate Access to Bank Accounts
My father was the only person with access to the company’s bank accounts. His employees were paid every two weeks and rent was due at the end of the month for all the parking garages the company managed. Getting access to the company's funds required the Commissioner of Accounts’ stamp of approval. This meeting took a couple of weeks to schedule. In order to pay my father's employees, I had to borrow thousands of dollars from my mother. This was both inconvenient and it created additional accounting work on the estate's balance sheet.
Important Considerations:
Is there access to cash to pay employees, rent, etc right after death?
Does you executor know where your business banks? Do you have that information accessible somewhere?
Who does the book keeping? Does your executor know who to get in touch with?
Is there enough cash to pay your employees salaries for 1-2 months after you die and can the executor get access to that cash quickly?
Do you have money put aside so that your executor can hire a lawyer and an accountant to handle it all? Is this money liquid?
Is there money set aside for legal and accounting fees to close/continue operating the business? Is this money liquid?
Spell Out How Your Business Operates
Unless your executor is your business partner, there is a good chance that they will have very little knowledge surrounding the operation of your business. Is "what you do" and "how you do it" written down? When my father was dying from cancer, I took out a piece of paper and spent an hour outlining the operation of his business. Obviously, this timing is not ideal. It's important to recognize that both your executor and your employees will be grieving after you're gone. Avoid making them scramble and piecing together the story of your business. As the owner of a small business it is your responsibility to have your affairs in order.
List of Accountants and Lawyers with Their Contact Information
Does your executor have all the contact information for your accountants, lawyers, bankers, financial planners, etc? My father’s accountant conveniently retired the year before he passed away and was unwilling to help me with his tax returns. My father's estate lawyer made a referral and my new accountant took me on as a client as a favor to my lawyer. However, this came with a cost. In the moment you are settling your father’s affairs, the last thing on your mind is to shop around for the best value. It was February and taxes were due in April. There wasn’t time for me to contemplate if I was getting a good deal or if I could get a second opinion. I needed to find someone who would squeeze me into their busy schedule.
Create a One Pager Outlining What is Required to Close Your Business
Each state has different requirements for reporting business closure. If you wish for your business to close after you die, your executor will appreciate a guide outlining these reporting requirements. Between the Commission of Accounts, my lawyer, my accountant, and google I was able to piece together the steps I needed to take to report that my father’s business has closed. Remember, the operating agreement declared that the business ceased upon death. Even though I ended up handing the company over to the employees, the actual entity had ceased to exist. The employees had to create a new LLC. It was my responsibility as the executor to report the closure and to pay all outstanding local and federal taxes on behalf of the estate.