When the owner of a small business fails to plan ahead, it dramatically increases the likelihood that the business will fail to successfully transition to the next generation. One common cause of that failure is federal gift and estate taxes. When the business owner dies, all of the business assets are subject to taxation because they remain part of his/her estate. All too often, assets necessary to the survival of the business must be liquidated just to cover the tax bill. Failing to plan ahead remains problematic even if the owner does not plan to pass the business down because that lack of planning often means the survivors do not receive a fair price for the business if something happens to the owner. To ensure that your business is prepared, the Waukegan asset protection planning attorneys at Hedeker Law, Ltd. explain some common asset protection strategies for small business owners.
Why Is Asset Protection Planning Necessary for a Small Business Owner?
As a small business owner, you have undoubtedly invested a significant portion of your life, and your resources, into getting your business off the ground and running smoothly. It would certainly be a shame to see all of that hard work and sacrifice go to waste because you failed to protect your business properly against potential threats. Insuring your business against loss is only the beginning of the steps you should take to properly protect the time and money you have invested into your business. Your business assets could also be at risk because of a wide range of threats, including:
- Your own divorce
- Federal and/or state gift and estate taxes
- Business debts
- Your own incapacity
- Long-term care expenses
The list of potential threats to your small business is likely much longer than you realized. It is for this reason that asset protection strategies should be incorporated into your comprehensive estate plan.
Asset Protection Strategies
The asset protection strategies you choose to use to protect your small business will depend, to a large extent, on the specific threats that are most likely to impact your business. Some common strategies, however, include:
- Choosing the right legal entity for your business. Traditionally, there were three basic entities from which a business owner could choose – sole proprietorship, partnership or corporation. A sole proprietorship is the default structure when a single individual is operating a business and has done nothing to form any other type of entity. A partnership exists when two or more people operate a business and share in the profits of that business. Finally, a corporation requires the owners to file Articles of Incorporation and a number of other legal documents. Although a true corporation does protect the shareholders (owners) from personal liability, forming a corporation doesn’t always work as people anticipate. It may be possible for creditors to “pierce the corporate veil,” opening an owner up to personal liability for business debts.
- Entering into a Buy-Sell agreement. A Buy-Sell agreement is an agreement to sell your interest in the business to a specific party, or parties, at an agreed upon price, or using an agreed upon method for determining the price, in the event anything happens to you.
- Keeping business and marital assets separate. Even if you live in a state that recognizes separate property, that separate property can become marital property, and therefore subject to division in a divorce, if you unintentionally co-mingle the property.
- Transferring your interest in the business slowly. A Family Limited Partnership, or FLP, is often a better tool for transferring the business to the next generation while also providing some asset protection benefits. An FLP is a specific type of limited partnership. A limited partnership is a partnership that has two different types of partners – general partners and limited partners. General partners control all management and investment decisions and bear all of the liability for debts and other liabilities of the partnership. Limited partners cannot participate in the management of the limited partnership and have limited liability. Eventually, the entire business is passed down to the next generation of partners. By establishing an FLP, the majority (if not all) of the business assets are transferred to the next generation long before the death of the patriarch/matriarch.
- Including incapacity planning in your estate plan. Protecting your business assets requires considering the possibility of your incapacity, not just your death. Incapacity planning for your business will focus on ensuring that someone has been designated, and has the legal authority, to take over control of your business immediately in the event of your incapacity due to an accident or illness.
- Planning for long-term care. At some point, you may require long-term care. The cost of that care can be prohibitive. Unless you want to use your business assets to pay for that care, you will need to plan ahead by including Medicaid planning in your overall estate plan.
Contact Waukegan Asset Protection Planning Attorneys
For additional information, please download our FREE estate planning worksheet. If you have additional questions or concerns regarding asset protection planning for your small business in the State of Illinois, contact the experienced Waukegan assets protection planning lawyers at Hedeker Law, Ltd. by calling (847) 913-5415 to schedule an appointment.