Estate planning is pivotal for a business owner to ensure their objectives and wishes are carried out upon their passing. There are several types of estate planning tools that are available that can be applied to all types of businesses including limited liability companies, sole proprietorships, corporations, or partnerships. Business succession planning must include ways not only to ensure that your business continues but to also ensure there are minimal tax consequences. This article focuses solely on sole proprietorships and limited liability companies.
The biggest concern and question that needs to be answered is whether or not you intend for the business to continue to operate after your death. It will ultimately depend upon what type of entity is controlling your business as to the ease of the business continuing. There are different rules and consequences if the business is a sole proprietorship versus a limited liability company.
- Sole Proprietorship
A sole proprietorship is the simplest and fastest way to establish a business. The business can operate under the individuals name with minimal requirements to start the business. A sole proprietorship is an extremely common way for an individual to run a business. With a sole proprietorship there is no separation between the business and the owner operating the business. Therefore, with a sole proprietorship there needs to be deliberate and active estate planning to ensure the business itself is protected and to specify what you want to happen to your business after your death.
The owner of the business should have a Last Will and Testament executed that specially discusses their intentions with the business. This type of business is not going to seamlessly continue after the person passes away because it is solely associated with the deceased owner. Depending upon the planning in place, the owner’s will may have to be probated with the Surrogate’s Court to ensure the owner’s wishes are carried out. There may be a delay from the time the owner passes until the Executor is appointed to either continue the business or to carry out the wishes of the owner in regards to the business. Some types of businesses cannot afford to have any delays and need them to continue without interruptions.
If the business cannot be delayed, then a sole proprietorship is not the best business entity for you. I would recommend discussing other business entities with an attorney to determine which entity meets all of your business goals including your estate planning needs.
- Limited Liability Company
A limited liability company in New York is an entity that is filed with the New York Department of State. The structure of a limited liability company is similar to a corporation and provides the flexibility of a partnership. Individuals who own and operate a limited liability company are referred to as members and can be sole member or multiple member companies. A limited liability company is controlled by the operating agreement. The operating agreement contains important and pivotal information in regards to how the business shall run, who manages the business, and who the members of the company are. The operating agreement is going to be pivotal when discussing estate planning concerns with your attorney. Generally, the operating agreement will discuss what happens to the business and/or the members when they pass away. It should provide very clear and specific instructions in regards to what actions need to be taken after a member passes away.
If the intention of the member is to have the business continue to operate after their death, then there should be language added to the operating agreement to ensure that occurs. The language should state that upon the death of the member their interests in the company shall automatically terminate and shall directly transfer to the named incoming members without any further action needed from the incoming members. Also, it should state that the original member and his/her estate shall have no further rights in the company or assets, and that the estate is not entitled to hold an economic interest or have any other interest in the company. Adding this language to the operating agreement shall allow the business to continue without any interruptions and will assist with the overall goal of estate planning. It eliminates the need for the Members estate to become involved in the business.
This can be an extremely helpful tool in to use with estate planning. I recommend speaking with an attorney prior to making any decisions in regards to your business to ensure what you are proposing is the best option for you.