Running a small business comes with daily challenges, but few owners stop to think about what would happen if they were no longer able to run their company or if a disaster strikes, whether it be a fire, a flood or even a cyber attack. Estate planning and disaster preparedness are essential for safeguarding your business, protecting your employees, and ensuring financial stability.
NOTE: This is intended to be general guidance and may not be applicable in every situation. Businesses and individuals should consult an attorney for legal advice.
Estate Planning
Every small business owner should have a succession plan. Whether you operate as a sole proprietor, in a partnership, or through an LLC, having your wishes documented in advance will spare your loved ones and employees from confusion and conflict during an already difficult time.
The first step is to ask yourself: What do I want to happen to my business if I pass away or become incapacitated?
- Sole proprietors should remember that business assets are tied to personal assets. Your will needs to clearly state what should happen to the business.
- Partnerships require a written agreement that outlines what happens if one partner dies. Will the surviving partner buy out the deceased’s share? Will heirs inherit profits without management duties? Without an agreement, state law may force dissolution of the partnership.
- LLCs and LLPs have more flexibility but still require careful planning. Operating agreements should specify whether heirs can inherit ownership, how shares will be valued, and who will take over daily operations.
Our guide at the end of this blog will help guide you through these scenarios. In all cases, consulting with an attorney is crucial to ensure that documents like wills, Power of Attorneys, or buy-sell agreements are legally sound.
Key Person Insurance
One way to provide financial stability during a transition is through key person insurance. This type of life insurance helps surviving partners or the business itself buy out an owner’s share. A cross-purchase agreement lets surviving partners purchase the deceased’s interest, while an entity-purchase agreement allows the business itself to handle the buyout.
Special Considerations for Tenants
If your business operates in a rented space, make sure your lease addresses what happens in the event of your death. Under Kentucky law, leases do not automatically terminate when a tenant dies, meaning your estate could remain responsible for rent. Whenever possible, negotiate terms in writing and avoid oral leases, which can be difficult to enforce fairly.
Disaster Planning for Small Businesses
Kentucky has faced devastating natural disasters in recent years, leaving many small businesses struggling to reopen. Approximately 25% of businesses that experience a disaster do not reopen, according to the Small Business Administration (SBA). Some sources suggest this number is even higher, with figures like 40% and even 90% being cited.
A good disaster plan starts with four steps:
- Identify Risks
Consider both natural and man-made hazards. Are you in a flood zone? How secure are your digital records? Do you rely on a single supplier? Conducting a risk assessment will help highlight your most vulnerable areas. Check out our guide at the end of this blog for a straightforward risk assessment tool.
- Plan Ahead
Develop a response plan that includes communication strategies, data backups, and contingency operations.
- Implement Safeguards
Take practical steps such as storing key documents offsite, investing in backup generators, or cross-training employees so that essential functions can continue even if key staff are unavailable.
- Recover Quickly
After a disaster, the goal is to return to normal operations as soon as possible. Having recovery strategies in place, such as pre-identified temporary workspaces or agreements with alternate suppliers, can make all the difference.
Getting Support
No one likes to imagine worst-case scenarios, but taking time now to create both an estate plan and a disaster preparedness plan will protect not only your livelihood, but also the people who depend on you and your business.
You don’t have to go through this planning alone. Attorneys can help with estate documents and entity formation, while organizations like Kentucky Small Business Development Centers (SBDCs) and SCORE provide guidance on business strategy, succession planning, and disaster readiness.
We developed a detailed presentation and resource guide alongside AppalRed Legal Aid that will get you well on your way to developing these essential plans.
