When you’re committed to sound estate planning, there are many different things to consider. If you own your own business and want to create a sound estate plan, those considerations quickly multiply. Though many business owners never realize it until it’s too late, your company can have a major impact on important estate plan considerations ranging from tax concerns to asset protection. More importantly, a failure to recognize that potential impact could have dire consequences for the effectiveness of your overall estate strategy. The fact is that business structure matters, and it is important for every business owner to understand why.
Different Company Structures and their Advantages
To get a better idea about how your business structure could impact your estate planning, it can be helpful to understand a few things about some of the different structures that you can select for your company. Depending upon you needs, your decision may vary dramatically from those of your business peers.
The Sole Proprietorship
This is a common business structure that is relatively unregulated and simple to navigate. As a rule, your business and personal interests are intertwined under this structure to the point where they are legally regarded as being the same. The business’ legal concerns and tax obligations are yours – and so too is its liability. Nevertheless, many entrepreneurs continue to use this structure because it helps them to maintain greater control over the enterprise, while reaping all the rewards from the profits.
At the same time, however, it is important to recognize that legal liability can be a real challenge – especially in a country that is a litigious as the United States of America. If someone falls on your property, or has some other legal claim against your company, there is nothing to prevent your personal assets from being targeted in the suit. Obviously, that is a less than ideal situation, and can place your property and your family at great risk.
There are two main types of partnership: the general partnership and the limited partnership. With the general partnership, profits and losses are shared by all partners – but so too is any liability resulting from the operation of the business. When using this type of business structure, every partner’s personal assets are subject to liability if something goes wrong. Worse, any one of the partners involved in the endeavor can act in a way that obligates the entire partnership, and effectively render all partners liable for any debts incurred.
The limited partnership involves both general and limited partners. General partners retain the power to obligate the partnership, but it is they who then bear the liability for any debts incurred. The limited partners’ liability only extends to their own capital contribution to the enterprise.
The corporate structure is the most complex choice, and that complexity comes with a host of state regulations regarding how the business is created and operated. To maintain this corporate structure, there are certain formalities that must be tended to, and that increases the need for record keeping. You need to document things like meetings, corporate decisions, and more. On the bright side, this structure will protect your personal assets from the company’s debts, and can provide significant tax advantages as well.
Limited Liability Company
The limited liability company is a hybrid structure that combines elements of the other structure types. As such, it offers some of the specific benefits of each, while affording protections that they usually cannot. For example:
- The LLC can offer certain tax protections similar to a sole proprietorship or partnership, depending on the state and the circumstances.
- The limited liability company structure helps to separate your personal and business assets to limit your personal liability to lawsuits and other creditor actions.
- LLC assets are not considered to be the property of the owner, which can help to ensure that they are not calculated as part of your estate for tax purposes.
- Your LLC can offer incapacity protection by providing instructions that ensure that important business decisions continue to be made even if something happens to you.
Business Structure and the Succession Issue
Another thing that must be considered when selecting a business structure is the issue of succession. If you want to ensure that your company gets passed to your heirs when you die, then you need to have a plan in place to make that happen. Succession can be accomplished in several ways. Buy-sell agreements can provide a way to deal with ownership issues after you’re gone. There are also ways to pass on ownership by gradually transferring it to an heir over time. In addition, the corporate structure can provide some asset transfer help, since any shares that you own in a company are considered yours and can be passed on to heirs.
The LLC structure can be a useful tool for succession, but only if you have a plan that enables the company to survive your death. Under normal circumstances, an LLC will dissolve if its sole owner dies. When there is more than one owner, the surviving owners usually form a new LLC. You can keep the LLC alive and operating, however, but including provisions in its operating agreement that allow it to continue to be managed. That takes planning, however, and coordination with the other elements in your estate plan to ensure that your strategy can accomplish your objectives.
Get the Help You Deserve
At Frank & Kraft, Attorneys at Law, we know that the best way to ensure that your plan works is to partner with experienced business planning attorneys who can help you achieve your broader objectives. Our experienced experts can assist you in developing the strategies you need so that you can gain the peace of mind that comes from knowing that your business and estate planning are properly aligned. We’ll work with you to protect your business and personal assets, provide for orderly transfer of assets to the next generation, and secure your family legacy. For help with business structure decisions, succession plans, and overall estate plan strategies, visit us at our website today or call us by phone at (317) 684-1100.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.