Business Succession Planning in New York

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Separating Ownership from Management

Ownership and management are not necessarily the same thing.

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This distinction becomes especially important in family businesses.

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A business owner may want several children to benefit economically from the company while only one child is qualified or interested in managing it.

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Giving every child an identical ownership and management position can create conflict if their roles, experience, objectives, or involvement are very different.

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A succession plan can instead consider separate questions:

• Who should receive economic value from the business?

• Who should control important ownership decisions?

• Who should manage day-to-day operations?

• Who should have voting rights?

• Should ownership eventually be purchased from family members who are not active in the business?

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The answers may be reflected in the company's operating agreement, shareholder agreement, partnership agreement, buy-sell agreement, trusts, or other planning documents.

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Addressing these distinctions before the transition can reduce the likelihood that family members unexpectedly find themselves operating a business together without clear rules.

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Buy-Sell Agreements and Business Valuation

A buy-sell agreement can be one of the most important components of a succession plan when a business has multiple owners or an identified successor.

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The agreement can establish what happens to an ownership interest after specified events.

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Those events may include death, disability, retirement, termination of employment, divorce, bankruptcy, or an owner's desire to sell.

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Depending on the arrangement, the agreement may require or permit the company, the remaining owners, or another party to purchase the affected ownership interest.

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If you need help creating or reviewing a Buy-Sell Agreement, click here to Contact Us today.

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Establishing the Purchase Price

A succession agreement also needs a practical method for determining what the business interest is worth.

Possible approaches include a fixed value periodically updated by the owners, an appraisal process, a formula based on financial metrics, or another agreed valuation mechanism.

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A valuation method that seemed reasonable when an agreement was signed may become unrealistic years later if the company has grown substantially or the owners never updated the stated value.

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Business valuation should therefore be treated as an ongoing planning issue rather than something considered only after an owner dies.

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Funding the Purchase

An agreement requiring someone to buy an ownership interest is useful only if there is a realistic way to fund the purchase.

Depending on the circumstances, funding might come from available business or personal assets, installment payments, financing, life insurance, or a combination of sources.

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Life insurance is frequently considered when a buyout is triggered by death because it can provide liquidity at the time the purchase obligation arises.

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The ownership, beneficiary designations, amount of coverage, and terms of the buy-sell agreement should be coordinated rather than established independently.

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Planning for Death or Incapacity

Succession planning should address unexpected events as well as planned retirement.

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A business owner may intend to work for another 15 years but become unable to manage the company tomorrow.

The plan should therefore identify who has authority to act and how the business will continue if the owner becomes incapacitated.

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A power of attorney can be an important component of incapacity planning, but it should be coordinated with the company's governing documents and ownership structure.

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The individual authorized to handle the owner's personal financial affairs is not necessarily the person who should manage the business.

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Death creates a different transition.

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The owner's interest may become subject to the estate plan, business agreements, entity law, and other contractual restrictions.

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For a New York LLC, for example, the LLC Law specifically addresses the powers of the estate of a deceased member. The deceased member's executor or administrator may exercise the member's rights for purposes of settling the estate, including rights relating to an assignee becoming a member under the operating agreement.

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The company's governing documents and the owner's estate plan should therefore be reviewed together.

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Coordinating the Business With the Estate Plan

A business succession plan should not exist separately from the owner's estate plan.

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A will or trust may say who receives an ownership interest at death, but that provision needs to work with the company's operating agreement, shareholder agreement, partnership agreement, buy-sell agreement, and other contractual obligations.

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For example, an owner might attempt to leave a business interest equally to three children while a buy-sell agreement requires the interest to be sold to the remaining owners at death.

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Those documents need to be coordinated so that the owner's estate plan reflects what can actually happen under the business agreements.

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Wills and Trusts

Business interests can potentially pass under a will or be held through an appropriately structured trust.

Trust planning may be particularly useful when the owner wants beneficiaries to receive the economic benefit of a business interest without immediately receiving unrestricted individual ownership.

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Different trust structures may also be considered as part of estate-tax, gift-tax, asset-protection, or multigenerational planning.

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The appropriate structure depends on the business, the owner's objectives, the intended successors, and the tax consequences.

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Powers of Attorney

A business owner's power of attorney should be reviewed with the business in mind.

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Authority relating to business interests, contracts, banking, taxes, entity ownership, and other matters may become extremely important if the owner cannot act personally.

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Learn more about Powers of Attorney here.

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Life Insurance

Life insurance can provide liquidity for several succession-planning objectives.

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It may help fund a buy-sell obligation, provide value to family members who are not receiving the business, replace lost income, or provide liquidity for estate obligations.

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Insurance should be integrated into the plan rather than treated as a substitute for succession documents.

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Estate and Tax Considerations

The transfer of a closely held business can involve federal and New York estate-tax considerations, federal gift-tax issues, income taxes, valuation questions, and the tax consequences of the particular transaction.

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A lifetime gift of a business interest, a sale to a family member, a transfer at death, and a sale to an outside buyer can produce very different results.

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The timing and structure of the transition therefore matter. To learn more about these considerations, check out our Estate Tax page.

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Lifetime Transfers

An owner may choose to transfer portions of a business during life rather than waiting until death.

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Lifetime transfers can be made outright or through trusts and other planning structures.

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Potential benefits may include gradually transitioning ownership, shifting future appreciation, involving the next generation in the company, and implementing estate and gift tax planning.

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However, valuation, control, basis, gift-tax reporting, cash flow, and the owner's continuing financial needs must be considered before substantial ownership is transferred.

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Closely Held Businesses and Estate-Tax Liquidity

A business can create a particular estate-planning challenge because it may represent substantial value without producing enough liquid cash to satisfy estate obligations.

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Federal law contains special provisions that can apply to qualifying closely held business interests.

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For example, Internal Revenue Code § 6166 can permit qualifying estates to pay the portion of federal estate tax attributable to certain closely held business interests in installments when statutory requirements are satisfied. The IRS notes that the election is subject to detailed eligibility, payment and acceleration rules.

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This type of provision can be important, but it should not replace advance liquidity planning.

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The owner should consider how taxes, debts, expenses, family obligations, and any required business purchase will be funded without forcing an unwanted sale of business assets.

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Building a Business Succession Plan

Business succession planning is usually a process rather than a single document.

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The first step is identifying the owner's objectives.

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• Does the owner want the business to remain in the family?

• Is there a particular child, employee, or co-owner who should eventually control it?

• Does the owner expect to sell?

• How much income will the owner need after retirement?

• How much of the owner's net worth is concentrated in the business?

• What should happen if the owner dies before the planned transition?

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Once those objectives are established, the legal and financial structure can be evaluated.

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That typically includes reviewing the entity's governing documents, ownership interests, existing buy-sell arrangements, estate-planning documents, insurance, business valuation, tax considerations, and the financial ability of the proposed successor to complete the transition.

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The plan should then be revisited periodically.

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A succession strategy designed when children are young may no longer make sense when one child joins the company and another chooses a different career.

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Similarly, a buy-sell agreement based on an outdated valuation may fail to reflect the current economics of the business.

The strongest succession plans are designed to adapt as the business, the owner, and the family change.

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Business Succession Planning FAQs

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When Should a Business Owner Start Succession Planning?

Ideally, succession planning begins well before the owner expects to leave the business.

Starting early gives the owner time to identify and prepare successors, improve the company's ability to operate without the owner, address valuation and financing, coordinate estate-planning documents, and consider tax consequences.

It also protects against the possibility that incapacity or death occurs before the owner's planned retirement.

A business owner does not need to know the exact retirement date before beginning succession planning.

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Can I Leave My Business to My Children in My Will?

Potentially, but a will should not be reviewed in isolation.

The company's operating agreement, shareholder agreement, partnership agreement, buy-sell agreement, and other contractual restrictions may affect what happens to the ownership interest at death.

The owner should also consider whether the children actually want to own the business and whether equal ownership among them will create a workable management structure.

For some families, leaving the business to the child who operates it while providing other assets or benefits to other children may better accomplish the owner's objectives.

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What Happens to My Business if I Die Without a Succession Plan?

The result depends on the business structure, ownership agreements, and estate plan.

An ownership interest may become part of the deceased owner's estate, but inheriting an economic interest in a business does not necessarily mean the beneficiary automatically acquires every management or membership right.

For example, New York LLC law specifically addresses the rights an executor or administrator may exercise following a member's death, and the operating agreement can be highly significant.

Without coordinated planning, the owner's family, co-owners, employees, and fiduciaries may have to resolve ownership, valuation, management, and liquidity issues after the owner's death.

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What Is a Buy-Sell Agreement?

A buy-sell agreement establishes rules governing the transfer or purchase of a business interest after specified events.

It can address death, disability, retirement, an owner's desire to sell, termination of employment, or other triggering events.

The agreement may identify who can or must purchase the ownership interest, how the purchase price will be determined, how the transaction will be funded, and when payments must be made.

A buy-sell agreement is particularly important when the owners want to prevent an unexpected person from becoming an owner or want to create a predictable path for an owner's exit.

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How Do I Divide an Estate Fairly if One Child Gets the Business?

Fair does not always mean equal ownership of every asset.

If one child works in the business and other children do not, dividing the company equally may create both family and operational problems.

An estate plan can instead consider the overall economic value received by each beneficiary.

Other assets, life insurance, trusts, installment arrangements, or other planning techniques may be used to balance inheritances while allowing the business to remain under appropriate ownership and management.

The appropriate solution depends on the value of the business, available non-business assets, the owner's financial needs, and the roles of the children.

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Related Resources

High Net Worth Estate Planning in New York

Learn how estate taxes, trusts, lifetime transfers, business interests, asset protection, and legacy planning can be coordinated for substantial estates.

Estate Planning in New York

Learn how wills, trusts, powers of attorney, beneficiary designations, and other planning documents work together.

Irrevocable Trusts in New York

Learn how different irrevocable trust structures can be used for estate-tax, wealth-transfer, beneficiary, and other planning objectives.

Grantor Trusts in New York

Learn how grantor trust taxation can be used in sophisticated lifetime gifting and wealth-transfer strategies.

Generation-Skipping Trusts in New York

Learn how multigenerational trust planning can help preserve family wealth for children, grandchildren, and later descendants.

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Sources & Legal References

U.S. Small Business Administration — Close or Sell Your Business

https://www.sba.gov/business-guide/manage-your-business/close-or-sell-your-business

U.S. Small Business Administration — Grow Your Business: Transfer Business Ownership

https://www.sba.gov/business-guide/manage-your-business/grow-your-business

Internal Revenue Service — Instructions for Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return

https://www.irs.gov/instructions/i706

Internal Revenue Service — Estate and Gift Taxes

https://www.irs.gov/businesses/small-businesses-self-employed/estate-and-gift-taxes

New York State Senate — New York Limited Liability Company Law § 608, Powers of Estate of a Deceased or Incompetent Member

https://www.nysenate.gov/legislation/laws/LLC/608

New York State Senate — New York Limited Liability Company Law

https://www.nysenate.gov/legislation/laws/LLC

New York State Senate — New York Business Corporation Law

https://www.nysenate.gov/legislation/laws/BSC