What Is a Business Perpetuation Plan?
A business perpetuation plan determines what happens to the ownership of a business when the current owner dies or retires. Having an effective plan in place can prevent many problems that typically arise when no ownership succession has been planned for in advance. The purpose of this plan is to eliminate confusion and uncertainty.
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Features
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A business perpetuation plan can include a buy-sell agreement that specifies who will purchase a business and how they will pay for it. A plan can also include information about who should be elevated to certain positions within a company.
Value
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One of the important parts of the perpetuation planning process is determining the realistic value of a business. For this part of the process, hiring a qualified business appraiser can be beneficial. You can simply add up the value of the assets you have, but this method would not take into consideration the amount of business you do. It is important to know the value of a business so you can set a fair price in the buy-sell agreement.
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Buy-Sell Agreement
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The buy-sell agreement is a document that deals with selling a business from the owner to the successor, who could be a family member, a business partner, an employee, a competitor, or anyone else. The buy-sell agreement deals with the price that should be paid and how it will be paid. It is necessary even if a parent wishes to sell to a child.
Insurance
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Buy-sell agreements often use life insurance products to produce the money for a sale. For example, if a business owner wants to continue operating a business until death, his business partners could buy life insurance on him. When he died, the life insurance policy would produce a payout equal to the amount of the price agreed upon for the sale of the business. Then, the partners could provide the money to the estate to buy the business.
Tax Considerations
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Part of a good business perpetuation plan addresses tax considerations. When a business owner dies, there can be some estate tax issues. By working with an estate planning attorney and an accountant, you can more accurately predict what the tax situation will look like when you die. Looking at this in advance can help you eliminate tax problems for your beneficiaries when you die.
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