Starting a business is easy. Having it outlive you is surprisingly hard.
Let’s take a moment and discuss the afterlife of your business – as in what happens to your business after your life.
If you are like 73% of all small business owners, then you are operating your business as a sole proprietorship. Your business is not formally organized as a separate entity. You cannot legally keep your business assets separate from personal assets. You are personally liable for the debts and obligations of the business.
Your business has a defined life expectancy – yours. When you die, your business dies with you.
The business assets are lumped with the personal assets into your probate estate. There is no operational structure to keep the business running until the business assets can be sold.
For business succession planning purposes, a sole proprietorship is a horrible structure. Sorry.
Corporations & LLCs
On the other hand, if you are like 17% of small businesses, then you are operating your business as a corporation or an LLC. As an entity, your business has a life of its own and is perfectly positioned for succession planning. We’ll briefly look at both types and what happens upon your demise.
If your business is a corporation, then you own it as a shareholder. A shareholder has a limited and well-defined role, which is to vote on major issues and elect the Board of Directors. The Board of Directors manages the business as a fiduciary for the shareholders. The Board hires the President, Vice-President, and other officers. The officers are responsible for the day-to-day operation of the business. The business assets are owned by the corporation. With a few exceptions, you are not personally liable for the corporate debts.
When you die, the corporation lives on. Only your corporate shares will pass through your probate estate. The Board of Directors will keep directing, and the officers will keep working. For a brief period – only for so long as the probate lasts – your corporate shares will be managed by your executor.
It is much the same for an LLC, except the roles have different names. You own the LLC as a member. The LLC is either operated by its members or by a manager. The LLC operating agreement sets out the operational structure and what happens to the management and membership interest upon the death of a member. Your membership interests will pass through your probate estate and be managed by your executor.
For estate planning purposes, corporations and LLCs are prized because of their flexibility. They are a creature of contract, with any gaps filled in by statute. There is a written plan for appointing a successor manager, director, or officer. They are predictable.
If your business is operated as an entity, then your executor does not run the business and does not manage the business assets. Instead, he or she votes your shares as a member or a shareholder.
The remaining big percentage – 8%- of small business types is perhaps the worst of all for business continuity and succession planning: the general partnership. Your only hope is to have a good written partnership agreement with honest and honorable partners. Absent that, when you die the general partnership dies with you and the entire business will need to be wound up.
Hammerle Finley Can Help With Your Business Law Needs
Your initial choice of your business form – proprietorship, corporate, LLC, partnership, or other – will determine the afterlife of your business. An ongoing business usually has more value than a bunch of assets. If you have questions or concerns about how your business is currently set up, schedule a consultation with one of our experienced attorneys for assistance.