Are You and Your Business Prepared?

“Did Matthew have a plan to deal with his business?”

Sheila’s life partner, Matthew, died a week ago. He ran a successful bookkeeping business.

Sheila was in my law office to get advice. Here is what she wished she had known before Matthew had died suddenly.

Matthew did not have a will. He and his business were not prepared to protect his loved ones.

Matthew was a sole proprietorship. Without a will, he had no estate trustee or executor to operate the business. The business lost all value overnight and died with Matthew.

Matthew rented a small office for the business. His landlord wanted to know who would pay the back rent. Otherwise, the landlord wanted to trash everything inside the office. The landlord was only interested in getting a new tenant to pay rent.

Sheila asked me what rights she had. She wanted to remove papers from Matthews’s office. His clients were calling her at home looking for their financial papers.

Matthew had no succession plan for his business. He never considered what would happen once he was not around. He did not even have a power of attorney. Sheila had no signing authority at the bank for the business account. Matthew thought this was best to limit Sheila’s liability.

Business Assets v. Liabilities

What kind of estate plan do business owners need?

That depends on how they operate their business. Businesses can be sole proprietorships, partnerships or corporations.

Look at the problems Matthew left behind.

Matthew was the only owner. He was personally responsible for the business debts. Matthew received all the income which he reported on his personal tax return. Matthew’s Bookkeeping Services was the name of his business.

Matthews’s estate will have to satisfy all his business creditors, including his landlord and clients.

Matthew did not have a will. No one was authorized to collect his business receivables. Matthew’s executor would have been able to act immediately if he had a will.

Was Sheila exposed to any business liabilities?

Sheila needed to get advice. She needed to know if Matthews’s estate was not insolvent. In other words, that his assets did not exceed his liabilities. If there was any concern, Sheila should not take any steps to deal with the estate. Matthew’s creditors could always demand an accounting from her.

Matthew was not up-to-date with his own government filings. He had not filed an HST return for a while. Matthews’s credit card and business expenses were not protected with life insurance. Sheila had difficulty determining what Matthew owed for income tax and other bills.

Without a will, Sheila had no access to the Matthew’s Bookkeeping Services business account. She had a business bank statement with a $40,000 balance. Matthew’s estate could be wiped out by creditor’s claims and liabilities. She could not take any steps to sell the business to Matthews’s employee.

The bottom line was that Matthews’s business became less than worthless. Matthew’s business debts reduced the assets he wanted to leave for Sheila.

Estate Plans for Business Owners

Matthew could have made a business plan to:

1. Incorporate his business to protect his personal estate from business creditors. He could have left more for Sheila.

2. Make a will to authorize Sheila to operate the business until it could be sold.

3. Create a buy/sell agreement. Matthew’s employee could buy the business if something happened to Matthew.

4. Buy life insurance to pay his bills or fund a buy/sell.

The moral of Matthew’s story: The biggest risk is death. Protect loved ones with a business estate plan. Don’t short change your family.

About Ed

Edward Olkovich (BA, LLB, TEP, and C.S.) is an Ontario lawyer, nationally recognized author and estate expert. He is a Toronto based Certified Specialist in Estates and Trusts. Ed’s law firm website is © 2014

Life Insurance For the Business Owner

Let us suppose you have a business worth $3,000,000 and other assets worth $1,000,000.  Everything is looking good.  I approach you about life insurance.  You suggest that the business is your estate.  The wife and children will have $4,000,000 in the event of your death.

What should I do next?  I propose that we look at the problem from another perspective.

Suppose I have a client who is a young widow with children.  She has no experience running a business.  She has $3,000,000 cash and another $1,000,000 in other assets.  She comes to me for investment advice.  I tell her that I have an opportunity.  I know a business that is young but growing and prosperous and worth $3,000,000.

The business is worth $3,000,000 but the founder, principal decision maker, customer relations person, inventor, and the person the bank and suppliers trust will not be available to manage it, but maybe the employees can look after that.  I recommend that she buy and she does.

Do you think I am guilty of malpractice and should be held financially responsible when the business eventually fails or is sold, under pressure, for a low price?

You will answer yes and you will be right.

Why then does it make sense for you to force your hypothetical young widow into the exact same situation?  Except for the ability to sue me, that is.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.