When you are the owner of a small business, your long-term planning goals will coincide with those of people that are not self-employed. Many of the same steps should be taken, but business owners have some additional considerations, and we will look at two of them here.
It is important to protect the legacy that you want to pass along to your loved ones when the time comes. As a business owner, you should prioritize asset protection so you can separate your personal property from your business activities.
If you are a sole proprietor, there is no separation, so you should use a business structure that provides asset protection. One very commonly used solution is the limited liability company (LLC).
When you create an LLC, generally speaking, your personal property would be protected if creditors or other litigants file legal actions against the business. However, there are a few exceptions.
You could be personally liable if you directly cause damages while you are on the job. For example, you could be held liable if someone is injured as a result of your negligence while you are driving a company vehicle.
If you provide a personal guarantee when you take out a loan for business purposes, you would be in the crosshairs if a legal action is initiated. You can also be held responsible if you fail to deposit taxes that are withheld from employees’ wages.
On the other side of the coin, if you are sued, the property that is owned by the business would be protected for the most part. But once again, there are exceptions.
The court could issue a charging order that puts a lien on distributions that are paid to you by the LLC. A court order can be issued to dissolve an LLC, and an owner’s interest in a limited liability company can be foreclosed upon.
Family Limited Partnership
Another asset protection structure that can be a good choice for some business owners, investors, and professionals is the family limited partnership (FLP).
If you establish an FLP, you would be the general partner, and family members that you bring in would be limited partners. The general partner would be the sole decision-maker for the partnership.
Property that is held by the partnership would be separate from the personal property of the respective partners. The property in the partnership would be protected if any partner is sued, and vice versa.
An individual can establish multiple different partnerships that hold different interests to maximize the asset protection benefits. These partnerships can also be used by families that are exposed to estate taxes to facilitate transfers at a tax discount.
Succession Planning for Business Partners
If you are a partner in a small business, you can use a buy-sell agreement as a succession solution.
To implement this strategy, the partners get together to determine the value of a share in the business. When these agreements are being used for estate planning purposes, they take out life insurance policies on one another that are equal to the value of the share.
After the death of one partner, the insurance proceeds are used to purchase the deceased partner’s share from their estate. For general succession planning, this type of agreement can be used without the life insurance component.
Attend a Complimentary Seminar!
We are conducting a number of seminars over the coming weeks, and you can learn a lot if you join us for one of these sessions. They are being offered at convenient locations in our service areas, so this is a great way to invest a little bit of spare time.
You can visit our Connecticut Estate Planning Seminars page to see the dates and obtain reservation information.
Need Help Now?
If you are ready to work with an attorney from our firm to establish your estate plan, you can set up an appointment at our Glastonbury or Westport, CT estate planning offices if you call us at 860-548-1000. You can alternately use our contact form if you would prefer to send us a message.
- Exploring the Tax Benefits of Charitable Trusts - September 14, 2023
- The Ripple Effect of Dying Without a Will or Trust - August 29, 2023
- Will an Unwitnessed Handwritten Will Hold Up in Court? - August 10, 2023