As an owner of a small business, your long-term planning goals are often similar to non-business owners. However, business owners have additional concerns. We will look at two of them here.
Your legacy is important. To protect that legacy as a business owner, you must prioritize asset protection by separating your personal property from your business activities.
If you are a sole proprietor, no such separation exists. However, certain business structures provide asset protection. One commonly used structure is the limited liability company (LLC).
The Limited Liability Company (LLC)
An LLC protects your personal property against creditors or other litigants that might file legal actions against the business. However, some exceptions exist.
Even with an LLC, you could be personally liable if you directly cause damages while on the job. For example, you could be liable if someone is injured as a result of your negligence while driving a company vehicle. If you personally guarantee a loan for business purposes, your personal assets are at stake in a legal action. You can also become personally responsible by failing to deposit taxes withheld from employees’ wages.
If you are personally sued, the property owned by the business is generally protected. A creditor may obtain a “charging order” from a court that puts a lien on distributions (income) paid to you by the LLC, but the assets remain protected. In limited circumstances, a court order can dissolve an LLC or foreclose upon an owner’s interest in the LLC.
Family Limited Partnership (FLP)
Another asset protection structure that can protect business owners, investors, and professionals is the family limited partnership (FLP).
Under an FLP, you are the general partner, and family members might be limited partners. The general partner holds sole decision-making authority for the partnership.
Property held by the partnership is separate from the personal property of the respective partners. The partnership property is protected if any partner is sued, and vice versa.
An individual can establish multiple partnerships that hold different interests to maximize asset protection benefits. These partnerships might be used by families likely to owe estate tax to facilitate transfers at a tax discount.
Succession Planning for Business Partners
If you are a partner in a small business, you might use a buy-sell agreement as a succession solution.
To implement this strategy, the partners meet to determine the value of a share in the business. When these agreements are used for estate planning purposes, partners take out life insurance policies on one another 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 might be used without the life insurance component.
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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 in Oklahoma City by calling us at 405-843-6100. The number for an attorney in Overland Park, KS is 913-385-9400. You can also use our contact form if you would prefer to send us a message.