Skip to main content

Entrepreneurs are often capable business leaders. Yet, paradoxically, many solopreneurs are clueless when it comes to estate planning.

All too often, they seek advice about their estates when it's too late. Or, in many cases, they die without having conducted proper planning, putting all their hard work at risk. Sometimes, they've plowed their money into risky investments that collapsed. Below, are ways to avoid common mistakes that can rob you and your heirs of a secure future.

Typically, entrepreneurs consider their businesses a permanent meal ticket for their kids and grand kids. Not so. After years of toil, many small-business owners only have the business to show for it. Sometimes, not even that.

There are more than 32 million small-business owners in the U.S. and Canada. Every day, another 2,500 decide to go into business for themselves. But consider these sobering statistics:

  • 66% of new small businesses fail in the first 12 months.
  • 90% of new small businesses fail in the first five-six years.
  • 95% of small businesses will never reach $1 million in sales.
  • Among the 5% that do reach $1 million in annual sales, only 0.8% will make it to $5 million.

With the consequences of success or failure in mind, you should think about your exit strategy, vis a vis your estate. Many small-business owners and/or their heirs are taken aback when they discover the components that the government counts when calculating their taxable estate.

When adding up the value of your estate/small business, be sure to account for the following:

  • The potential tax obligations tied to the death of the owner;
  • Full value of the property of which you are the sole owner;
  • Half the value of the property you own jointly with your spouse with right of survivorship;
  • Your share of property owned with others, such as partners and family;
  • If you live in a community property state, half the value of community property;
  • The value of proceeds of any insurance policy on your life, provided that you own the policy;
  • Your interest in vested pension and profit-sharing plans;
  • The value of revocable trust property; and
  • Money due to you by creditors, such as mortgages, rents, and any accounts payable for past products and services rendered.

Also ask yourself: Have you developed a specific plan in your will, to provide for the heir(s), if it becomes necessary to liquidate the business after your death? Your estate should be an integral part of a strategic, wealth-building blueprint.

Your business structure also is crucial. If you don't establish a business structure that's right for you, from the start, you could hobble your future estate planning opportunities.

As a general rule, if your business is a start-up or is planning to lose money during its initial phase, consider a Sole Proprietorship for the sheer sake of simplicity. As soon as your firm starts turning at least a small profit, convert to an S-Corporation to take advantage of the pass-through status, the liability protection and the ability to save on Federal Insurance Contribution Act (FICA) taxes, which include contributions to federal Social Security and Medicare program taxes.

Once you're firmly in the black, a C-Corporation will address any liability concerns, and you can avail yourself of the different tax brackets between your corporation and your personal taxes. Remember, an overall lower tax burden also creates a business with a greater intrinsic value. That's an important consideration when planning your estate.

Business structure is a highly complex aspect of entrepreneurship and you need to get it right. Consult your financial advisers for details. You can start with the major brokerages, such as Charles Schwab, TD Ameritrade or T. Rowe Price.

By heeding the above guidelines, you can make sure that your golden goose doesn't turn out to be a cooked one.

Are you making the right investment moves for your retirement, or are you blowing it by making all-too-common money mistakes? There are crucial steps that you should be taking now, to build wealth over the long haul. To find out whether you'll have enough money in retirement, download our free report: Your Ultimate Retirement Guide.

John Persinos is editorial manager and investment analyst at Investing Daily. At the time of publication, the author held no positions in the stocks mentioned.