Sole proprietorships are a common type of ownership interest where the business owner and the business are the same. The business owner of a sole proprietorship is personally responsible for any debts the business incurs. However, unlike a corporation, the sole proprietorship belongs to one person and is legally a business indistinct from that one person. Once the sole proprietor dies, the business does too, creating the following potential estate planning problems:
Problem 1: The business’s assets go into your estate. Your business is legally no different from you, even if your business has a storefront, employees, and assets that are clearly not personal, like manufacturing equipment. If you die with a will, anything you use in business that you can will to your heirs will go to them eventually. If you die intestate (without a will), your business will be distributed according to the laws of the state.
Problem 2: Your business creditors can go after any part of your estate. If you owe money to any entity, they’ll get first crack at your estate. Say you have a bad year. You’re $30,000 in debt, and your business doesn’t have enough assets to cover the costs. If you die with this debt, almost anything in your estate may be liquidated to cover business debts, including your house.
Problem 3: If my heirs run the business, they may run into legal problems. Your heirs or your estate might be vulnerable to lawsuits if they try to wind down the business themselves. In Louisiana, your business dies with you, and there may be legal problems if your heirs run the business as if you hadn’t died.
Fortunately, there are solutions for owners who wish to close or pass their business down in a more responsible way. They include:
Solution 1: Create a trust to wind down the business. A Baton Rouge business planning lawyer can help you create a trust for your sole proprietorship so that upon your death, the trust gets the assets, and the Trustee of the trust can wind down your business and have any remaining assets go to your estate. This may or may not be available, depending on the type of business, so check with a Louisiana business planning lawyer first.
Solution 2: Create a buy-sell agreement effective upon your death. In Louisiana, you may be able to create a buy-sell agreement with someone, like your adult children, to go into effect upon your death. Your estate lawyer can help you create this agreement. Essentially, you agree to sell your business to someone when you die, but you continue to run it in good faith. When you die, the sale takes place and your heirs get cash instead of the ownership interest in the business.