Estate planning for your personal assets, such as your home, can be relatively straightforward. But estate planning for your business assets-sometimes called succession planning-presents unique challenges. The first step in succession planning is understanding the legal structure of your business and how it may interact with the probate system after your death.
In a sole proprietorship, there is no legal or tax distinction between you and your business. In a sense, when you die, the business dies with you, and your estate may still be responsible for any business-related debts just as it would be for personal debts. Any business assets are disposed of in your will, or if you don’t make a will, according to California’s intestacy law.
A common estate planning approach for sole proprietors is to include specific language in a will that a business be sold or a family member be named to assume the business. This may not be a practical option for all businesses. For example, an attorney or physician who practices as a sole proprietor may not have any assets aside from a client list.
Limited Liability Companies
A limited liability company (LLC) is something of a legal halfway point between a sole proprietorship and a corporation. Like a corporation, an LLC provides a legal barrier to separate an individual’s business and personal assets. But for tax purposes, an LLC is “disregarded” and any profits are treated as the individual income of the LLC’s members.
One-person or sole-member LLCs are permitted under the law. Unlike a sole proprietorship, membership in a sole-member LLC can be legally transferred just like stock in a corporation. An LLC typically adopts a written operating agreement that includes provisions for transferring or winding down an LLC in the event of the sole member’s death. Much like a will, the operating agreement can name one or more successor sole members who would assume ownership of the business. Keep in mind, an LLC “member” can be a trust, corporation or even another LLC. The operating agreement might also specify procedures for closing the business and distributing the assets to family members or other persons.
A corporation provides a separate tax and legal identity for your business. Corporation profits can be taxed as dividends rather than salary income. And corporation stock can be transferred, sold or subdivided without the written operating agreement of an LLC.
If the sole shareholder of a corporation dies, his or her stock passes like any other part of an estate, either by will or intestacy. Stock may also be transferred to a trust. For example, let’s say you want your family to continue benefiting from your business, but you don’t want them to actually run the business. You could transfer your stock to a revocable living trust, so that during your lifetime you’d continue to oversee the business, and upon your death a successor trustee-say, a professional fiduciary or a trusted employee-would continue to manage things while guaranteeing your surviving family a share of the profits.
Whatever form your business takes-and this article did not address multiple-owner businesses, which raise additional challenges-it’s important you work with a qualified San Diego estate planning attorney who can advise you on the best succession plan for your sole proprietorship, LLC or corporation. Contact the Law Office of Scott C. Soady today if you have any questions.