Small businesses make up about half of the private sector employment in the United States. While the exact number fluctuates, there are roughly 40 million small business in the U.S. Sixty percent of the people who start small businesses are between the ages of 40-60. Our economy depends on small business owners, and for most small business owners they would like to see their business legacy continue after they pass.
If you are among this group, it is important to make appropriate provisions in your estate planning, especially if you have partners, employees, or family members who depend on the business. The type of planning required will depend on the specific legal structure of your business.
Sole Proprietorships
A sole proprietor is anyone who does not incorporate his or her business. If you are without partners and you file a Schedule C with your federal tax return, you are a sole proprietor. Sole proprietors may operate businesses with multiple employees.
Sole proprietorships lack a separate legal identity from their owners. When the sole proprietor dies, the business dies. Probate law allows the personal representative of a deceased sole proprietor to “continue the operation” of the business for a period of months without a court order. Depending on the type of business, the personal representative may be able to sell its assets and distribute the proceeds to the heirs or beneficiaries.
If you are operating your business as a sole proprietorship, and you want to see it continue after you pass, you will need to take steps to organize it as a different business entity. These steps can be simple and inexpensive.
Partnerships
A partnership is a business with two or more owners. While not legally necessary, many partnerships operate under a written agreement. Ideally, that agreement will specify how the deceased partner’s portion will be treated and how the surviving partner(s) will proceed in the event of the first partner’s passing. If not, a probate court may allow the estate’s personal representative to continue as a partner in the place of the decedent for the benefit of the estate.
Limited Liability Companies
A limited liability company (LLC) is a business that has separate legal existence from its owners (or “members”) although it is treated as a sole proprietorship or partnership for tax purposes. An LLC may have one or many owners.
Because an LLC is a separate legal entity, it does not necessarily end when an owner, or all owners die. If the LLC only has one member, and that person dies, the membership interest may pass according to the terms of his/her Will or Trust, or, in the absence of an estate plan, under state intestacy laws.
As with partnerships, an LLC should have a written agreement providing for what to do when members die. In the absence of such a provision, deceased members are typically “disassociated” from the LLC upon death. In these cases, the personal representative may exercise the member’s rights for the purpose of settling the member’s estate.
Corporations
A corporation is a separate legal and tax entity from its individual owners (or “shareholders”). This means that when a shareholder passes, his or her shares typically pass pursuant to an estate plan, or to intestacy law. Many closely held corporations have buy-sell restrictions written into their articles of incorporation or bylaws to aid in the transition of shares. If you are also an officer or director of the corporation at the time you pass, the corporation will need to have a succession plan.
Takeaway
Hopefully, this brief summary will prompt you to think about how to best create your succession plan. Every situation is unique. Make sure you have the proper plan, and the proper business entity to support your goals. Contact CASHMAN LAW today for a free consultation to see how we might help you understand the legal issues involved in developing your plan.
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The contents of this blog are intended to convey general information only and not to provide legal advice or opinions. The posting and viewing of the information on this blog should not be construed as, and should not be relied upon for, legal or tax advice in any particular circumstance or fact situation. While effort is taken to update the information presented, it may not reflect the most current legal developments. Please contact CASHMAN LAW FIRM LLLC (Hawai’i)/ CASHMAN LAW LC (California) to consult with an attorney for advice on specific legal issues.