Many Californians are self-employed or own their own small business. 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 need to continue the business after your death. The type of planning required will depend on the specific legal structure of your business.
A sole proprietor is anyone who is self-employed and does not incorporate his or her business. This can include anything from a work-at-home consultant to someone who operates a retail store with multiple employees. Basically, if you file a Schedule C with your federal tax return and you do not have any partners, you are a sole proprietor.
While sole proprietorships are popular because they require little in the way of legal paperwork to get started, such businesses also lack a separate legal identity from their owners. In other words, when you die, the sole proprietorship basically dies with you. California law allows the personal representative of a deceased sole proprietor to “continue the operation” of the business for up to six months without a court order. Your personal representative may also petition the probate court to “discontinue” the business. Depending on the type of business, the personal representative may be able to sell its assets and distribute the proceeds to your heirs or beneficiaries.
A partnership broadly refers to any unincorporated business with two or more owners. While many partnerships operate under a written agreement, it is not legally necessary. For example, if you and your sister decide to open a bakery together and split the costs and profits equally, you are now in a partnership.
Ideally, even in a business among family members, there is a written partnership agreement specifying how the survivors should proceed in the event of one partner’s death. For instance, an agreement may direct the surviving partner to buy out the decedent’s share of the business for its appraised fair-market value. Absent any partnership agreement, however, a California probate court may authorize the estate’s personal representative to “continue as” a partner in place of the decedent.
Limited Liability Companies
A limited liability company (LLC) is a business that has separate legal existence from its owners (who are called “members”) although it is treated as a sole proprietorship or partnership for tax purposes. An LLC may be formed by one or more persons.
As with partnerships, it is good practice for LLCs to have a written agreement providing for what to do when a member dies. If there is no such provision, California law states a member is “disassociated” from the LLC upon death. In such cases the personal representative or executor “may exercise all of the member’s rights for the purpose of settling the member’s estate.”
If the LLC only has one member, and that person dies, the membership interest may pass according to the terms of their will or trust or, barring that, to the appropriate heir under California intestacy law.
A corporation is considered a completely separate legal and tax entity from its individual owners (shareholders). This means that when you die, your shares in the company simply pass under your estate plan or intestacy law. The corporation itself continues to exist without any interruption.
Get Help From a California Estate Planning Attorney
This is only a brief overview of how death can affect your business interests. Every situation is unique, which is why you need to speak with a qualified San Diego estate planning lawyer who can advise you on your specific needs. Contact the Law Office of Scott C. Soady to speak with an attorney today.