“I’ll just sell the business when I’m ready to retire.”
For many business owners, that sounds like an exit plan. But deciding that you eventually want to sell your company is only the beginning.
A successful transition can require answering much more practical questions. What is the business worth? Who might buy it? Could it continue operating without you? Are there restrictions on transferring your ownership interest? And what happens if illness, incapacity, or another unexpected event forces you to step away earlier than planned?
Succession planning is about addressing those questions before the transition becomes urgent.
Start With the Exit You Actually Want
Not every business owner wants the same outcome.
One owner may eventually sell to an outside buyer. Another may want to transition the business to family members. Others may consider arrangements involving existing owners, employees, or another successor.
The U.S. Small Business Administration (‘SBA”) recommends creating a thorough plan when selling, transferring, or closing a business and notes that the appropriate approach can depend on the business structure and circumstances.¹
Before getting into legal documents or tax planning, an owner should therefore begin with a bigger question:
What do I actually want to happen to this business when I am no longer running it?
The answer can shape many of the decisions that follow.
Know What Your Business Is Worth
If selling the company is part of the plan, owners should develop a realistic understanding of its value.
The SBA recommends using business valuation to establish a monetary value before marketing a business to prospective buyers. It identifies common valuation approaches based on income, market comparisons, and assets. It also notes that valuation may need to account for intangible assets such as brand presence, intellectual property, customer information, and projected future revenue.¹
There is another reason valuation matters: for some owners, the company represents a substantial portion of their personal wealth.
An owner who expects a future sale to help fund retirement should have more than an informal estimate of what the company might be worth. A qualified valuation may be appropriate depending on the circumstances.
Knowing the business’s value can provide a stronger foundation for both succession and personal financial planning.
Make Sure the Business Can Function Without You
A business can be successful and still face significant continuity challenges if too much depends on its founder.
If one person holds the key client relationships, approves every major decision, controls access to important information, and manages most essential operations, an unexpected absence can create problems quickly.
Succession planning should therefore involve more than deciding who will receive an ownership interest.
Owners should ask:
- Who can make essential decisions?
- Who understands the company’s major financial and operational obligations?
- Are important processes documented?
- Who maintains key client, vendor, and professional relationships?
- Could the business continue operating if the owner were unexpectedly unavailable?
A company that is less dependent on one individual may be better positioned for continuity, regardless of whether the eventual transition involves a sale, family succession, or another arrangement.
Review Your Governing Documents
Business owners should understand what their existing agreements allow before deciding how ownership will eventually change.
This is particularly important when a business has multiple owners.
The Maryland LLC rules discussed in this article apply to LLCs formed in Maryland. An entity formed in another state is governed by that state’s law.
For Maryland LLCs, an operating agreement can establish rules concerning management, assignment of membership interests, and admission of members.² Maryland law also provides that, unless otherwise agreed, an assignment of an interest in an LLC does not by itself make the assignee a member or give that person the rights of a member. An assignee generally becomes a member only through the process the operating agreement provides or with the unanimous consent of the members.³
Depending on the business structure, relevant documents may include operating agreements, by-laws, articles of incorporation, shareholder agreements, partnership agreements, buy-sell agreements, or other governing arrangements.
The question is not simply:
“Who do I want to take over?”
It is also:
“Do my current agreements support the transition I want?”
Separate Ownership From Leadership
The person who benefits economically from the business does not necessarily have to be the person who manages it.
That distinction can be especially important in family businesses.
Perhaps several family members should benefit economically from the company, but only one has been actively involved in running it. In another business, experienced management may continue operating the company even though ownership changes.
Maryland LLC law illustrates this distinction. A membership interest includes both an economic interest and a noneconomic interest. Unless otherwise agreed, noneconomic rights include rights to participate in management, vote on company matters, and inspect company records. ⁴
A succession plan can therefore address ownership and management separately instead of assuming they must always pass to the same person.
A Business Sale Can Have Significant Tax Consequences
“Selling the business” can mean different things legally and for federal tax purposes.
When a transaction involves the sale of a business’s assets, the IRS explains that the business is generally treated as selling individual assets rather than one single asset. Different types of assets can receive different tax treatment, and gain or loss may need to be determined separately for each asset.⁵
For certain transfers of a group of assets constituting a trade or business, federal rules also require the consideration to be allocated among the assets. When the requirements of Internal Revenue Code §1060 apply, the purchaser and seller generally use Form 8594, Asset Acquisition Statement, to report the allocation.⁶
If an owner instead sells ownership interests in the entity itself, such as stock or LLC or partnership interests, the tax treatment can differ depending on the entity type and the assets it holds.
The tax treatment of a transaction depends on what is being sold, the business structure, how the transaction is structured, and other facts.
That is why legal and tax planning can be valuable before the major terms of a sale are finalized rather than after the transaction has already been negotiated.
Plan for the Exit You Didn’t Choose
A succession plan should address the transition an owner wants, but it should also consider what happens if events change that timeline.
Death, incapacity, illness, or other unexpected circumstances can force a transition earlier than anticipated.
Maryland law provides specific rules for an LLC that has no remaining members. Generally, unless otherwise agreed or an exception under Maryland law applies, a Maryland LLC is dissolved and must commence winding up its affairs once it has had no members for 90 consecutive days.
The statute also provides mechanisms by which the LLC may continue notwithstanding the absence of members. Within 90 days after there are no remaining members, or within any alternative period provided by the operating agreement, the last remaining member’s successor or assignee may agree in writing to continue the LLC and be admitted as a member, or appoint a designee to serve as a member. A new member may also be admitted in the manner provided by the operating agreement.⁷
In addition, where the last remaining member ceased to be a member because of death or a judicial determination of incapacity, the member’s personal representative or guardian is generally admitted automatically as a new member, subject to the statutory right to renounce that admission or designate another person within the applicable 90-day period.
The precise result depends on the facts and the company’s governing documents.
But the broader lesson is much simpler:
Your business should have a plan for an unexpected transition as well as the planned one.
This is where business succession, continuity, and estate planning can intersect.
Start Before You’re Ready to Leave
Succession planning does not mean an owner is preparing to retire tomorrow.
Starting earlier can provide more time to strengthen management, organize financial and operational information, review governing agreements, obtain an appropriate valuation, prepare potential successors, and address issues that could complicate a future transition.
The goal is not simply to leave the business.
It is to determine what should happen to the company, its ownership, and the people who depend on it when you eventually step away.
At the Law Offices of Beverly Winstead, we help business owners consider how business, estate, tax, and succession planning work together when preparing for the future of a company.
Whether you envision selling your business, transitioning it to the next generation, or simply want to make sure the company can continue without you, planning before the transition becomes urgent can provide greater clarity.
Contact the Law Offices of Beverly Winstead to schedule a consultation and begin reviewing your succession plan.
This article is for general informational purposes only. It is not legal or tax advice, and reading it does not create an attorney-client relationship. Attorney advertising.
Sources & Legal References
- U.S. Small Business Administration, Manage Your Business – Close or Sell Your Business. The SBA discusses business valuation, sales agreements, and ownership transfers. U.S. Small Business Administration guidance
- Maryland Code, Corporations & Associations § 4A-402, addressing matters that may be covered by a Maryland LLC operating agreement. Maryland General Assembly § 4A-402
- Maryland Code, Corporations & Associations § 4A-603, addressing assignment of an economic interest in a Maryland LLC. Maryland General Assembly § 4A-603
- Maryland Code, Corporations & Associations § 4A-101, defining economic interests, noneconomic interests, and membership interests. Maryland General Assembly § 4A-101
- Internal Revenue Service, Sale of a Business, addressing federal tax treatment when business assets are sold. IRS – Sale of a Business
- Internal Revenue Service, Instructions for Form 8594, explaining when purchasers and sellers must report an asset acquisition under §1060. IRS – Instructions for Form 8594
- Maryland Code, Corporations & Associations § 4A-902, addressing dissolution and continuation when a Maryland LLC has no remaining members. Maryland General Assembly § 4A-902