It’s All About You, Except when it about Them.
In a sole proprietorship, you and your business are the same. If you die so does your business. Harsh? Sure, but it’s a fact. If you die your family will have to sell any assets of the business (if you have any), pay off debts and anything left will be distributed according to your will. You have a will or trust, right? There will be no more income to support your family and if your debts are substantial, your family gets nothing. That is a horrible result.
If you are like most small business owners all of your time. Really ALL of your time is spent trying to sustain, manage and hopefully grow the business. You are also most likely in a service business so you have few hard assets. You may have heard about “Succession Planning” but do not think about it because you believe that is for big companies. Bad thought. Even if you think that there is no business if you die, you are forgetting about the consequences to your family.
Many people avoid seeing an estate planning attorney because the need is not urgent (hopefully). Well, the same is true for most sole proprietors. You don’t think about this. Guess what? The issue won’t go away.
Well, there are things you can do that are not so onerous and that will make a big difference. Whether you choose to let your business end or find a way to continue it, you know what happens if you fail to plan at all. You have the ability to create a path that makes it easy or hard.
What Should your “Business Estate Plan” look like?
- Life insurance. Your business is probably the sole or primary source of household income. Life insurance can provide funds for your family to pay expenses and perhaps live on until they can find another source of income. If you have a partner, life insurance can pay for your partner to buy out your interest.
- Assembly your Important Documents. To make it easier to sell or transition your business you should have your paper ducks in a row. The last question your family should be asking is “where are those documents” or “how did this get done.” Take the time to organize your paperwork. Include:
- An operations manual. That’s right. Memorialize how you do things. Hate to write? Dictate it electronically. Siri can help….
- Have an organized customer list and database.
- Make sure some has access to your passwords for banking and any websites you access. Think about using a password app like LastPass.
- Create a paper or electronic folder with your legal documents.
- Create another folder for your important business documents e.g. contracts, leases, operating agreement
- Make sure you have a Durable Financial Power of Attorney in case you become disabled.
- Finally. You knew this was coming….GET YOUR ESTATE PLAN DONE and seriously consider a trust. Putting a business through probate can be a nightmare.
- An Emergency Account. Having access to cash to pay immediate bills and other needs would go a long way to provide comfort. This would give your family and advisors time to make decisions calmly without having to rush around trying to figure out how to keep things in place until decisions can be made about what to do with the business.
- Instructions. This may be the simplest thing to do, but the hardest to get done. Sit down and over time create an instruction document for your family. Tell them where your important documents are. Leave them information about what must be taken care of immediately. Avoid having your family in the dark about what to do at a time when they are in the middle of grieving. If they have such a document or checklist it will make it easier for them to step in and keep things running until they can get a handle on what to do.
What if you have an LLC?
LLCs should have an operating agreement, even if it is a single member LLC. In Arizona, if you do not have an operating agreement, the state provided one for your and that might not be what you want especially if the immediate dissolution and distribution of assets is required. The operating agreement should say what will have in the event you or another member if you are a multi member LLC.
Certainly, if your business is bigger than just you, the more effort you should be putting into your succession plan, but as pointed out even the sole proprietor has plans that can make a big difference.
If you have any questions, please feel free to schedule an initial call with Greg Poulos to discuss this and other business law concerns Schedule a Call.
This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.