An often overlooked part of estate planning is business succession. If you own and operate your own business, it is essential your estate plan make provisions to either wind-up the business upon your death or transfer those assets to a designated successor. This is especially true if your business is not incorporated-that is, you operate a sole proprietorship or even a one-member limited liability company.
Separating Business and Personal Assets
A recent case from the Georgia Supreme Court is instructive. Robert Haege died in 2006. Haege operated an art business under the name Traditional Fine Art, Ltd. In his will, Haege left his “personal assets” to his siblings and his “business assets” to his siblings and two of his employees.
The siblings argued that Traditional Fine Art was a personal asset, as a sole proprietorship has no legal existence separate from the deceased Haege. The employees sued, claiming the language of the will clearly contemplated a distinction between the Traditional Fine Art assets and other personal property owned by Haege. The Georgia Supreme Court sided with the employees. The Court cited the express language of the will, which referred to “all of my business interests, both tangible and intangible, real or personal, connected to the business known as Traditional Fine Art, Ltd.” (Emphasis in original)
One way to avoid such confusion is to incorporate your business so there is an unmistakable distinction between personal and business assets. A corporation, unlike a sole proprietorship, has a separate legal identity from its owner. Upon the owner’s death, his or her shares in the corporation are still transferred by will, but the business itself remains in operation.
Probating a Business
Still, corporations are not always the best option for every small business. Sole proprietorships are generally easier to administer while the owner is still alive. But what happens to the business when the sole proprietor dies? Under California law, the executor of an estate may continue an unincorporated business for up to six months without a court order. Thereafter, the executor must get a probate judge’s permission to continue the business, wind up the business, or transfer the assets to a new owner.
An alternative to a sole proprietorship or corporation is a partnership, where you bring in one or more people who can assume ownership of the business after your death. A partnership is not a corporation. Profits and losses from partnerships are generally allocated to each individual partner. The partners sign an agreement that specifies each person’s share and duties, and may include provisions for dealing with the death of a partner. For example, you might bring in a “silent” partner who owns 10% of the business until your death, at which time he assumes full ownership and continues the business as a sole proprietor.
There are, as you can see, many options for dealing with unincorporated assets as part of your estate plan. The important thing is that you work with an experienced California estate planning attorney who can help determine the best option for you and your business. Contact the Law Offices of Scott C. Soady in San Diego today if you have any questions.