In the grave and beyond! Beyond business
Starting a business is easy. Getting it to survive yourself is surprisingly difficult.
Let’s take a moment and discuss the afterlife of your business – like what happens to your business after your life.
If you are like 73% of all small business owners, you are operating your business as a sole proprietorship. Your business is not formally organized as a separate entity. You cannot legally separate your business assets from your personal assets. You are personally responsible for the debts and obligations of the business.
Your business has a defined life expectancy – yours. When you die, your business dies with you.
Business assets are grouped together with personal assets in your probate estate. There is no operational structure to run the business until the assets of the business can be sold.
For the purposes of business succession planning, a sole proprietorship is a horrible structure. Sorry.
On the other hand, if you are like 17% of small businesses, you are operating your business as a corporation or LLC. As an entity, your business has a life of its own and is perfectly positioned for succession planning. We’ll take a brief look at both types and what happens when you die.
If your business is a corporation, you own it as a shareholder. A shareholder has a limited and well-defined role, which is to vote on major issues and to elect the board of directors. The board of directors manages the company as a trustee for the shareholders. The board hires the president, vice-president and other officers. The agents are responsible for the day-to-day management of the business. The company’s assets belong to the company. With a few exceptions, you are not personally responsible for the debts of the business.
When you die, society survives. Only your company shares will go through your probate succession. The board will continue to lead and the officers will continue to work. For a short period – only for the duration of the probate – your shares will be managed by your executor.
It’s pretty 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 defines the operational structure and what happens to the management and interests of the members upon the death of a member. Your membership interests will flow through your probate estate and will be managed by your executor.
For estate planning purposes, corporations and LLCs are valued because of their flexibility. They are a creature of the contract, with all the loopholes filled by law. There is a written plan for the appointment of a manager, director or successor officer. They are predictable.
If your business is operated as an entity, your executor does not run the business or manage the assets of the business. Instead, he or she votes your shares as a member or shareholder.
The remaining large 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 reputable partners. Otherwise, on your death, the general partnership dies with you and the entire business must be liquidated.
Your initial choice of the form of your business – sole proprietorship, business, LLC, partnership, or whatever – will determine the afterlife of your business. A current business is generally more valuable than a collection of assets.
Virginia Hammerle is president of the law firm Hammerle Finley and certified by the Texas Board of Legal Specialization in civil trial law. To receive his newsletter, send an email [email protected] or visit hammerle.com. This section does not constitute legal advice.