How does your small business Corporation or LLC pass to your family members upon your death?
We have come across many entrepreneurs and small business owners who have taken their business to the next level by incorporating into a C-Corp, or Sub-S Corporation or an LLC. This provides the business with a lot of protection and flexibility but it doesn't automatically pass down to your heirs upon your death or keep your business legally operational if the shareholder/owner becomes incapacitated.
Consider how these formal business entities operate. The entity starts with owners, known as shareholders in context of a corporation, or members in context of an LLC. The shareholders or members vote to appoint managers of the business, known as Officers in a corporation context or Managers in an LLC context. Most small businesses are owned by one person or a married couple. They own the stock outright (single person, or sometimes only held by one spouse) or 50/50 (husband and wife are involved in the business), and they appoint themselves as the Officers or Managers.
Let's use an example where there is no business continuation plan in place. Let's say Joe is the sole Shareholder and Officer of the Corporation, and Joe suffers a stroke rendering him incapacitated. How does the business continue to operate? Who signs contracts and agreements? Who authorizes company activities? Who authorizes and pays the bills? In other words, is anyone authorized to step-up for Joe with all his legal authority to keep things moving until Joe recovers (if at all)?
What if, instead of Joe becoming incapacitated, he dies. Do his family members automatically have the legal authority to step in to run or sell the business? If not them, who?
The answer to both of these scenarios is NO ONE. At this point, only the court can intercede. If Joe is incapacitated, the court will step in to supervise a conservatorship petition which could take months or more to conclude. During this time, the court steps in and appoints someone to run the business as a custodian. This person often knows nothing about the business, its customers or how things work. Ultimately, the court will decide who will be allowed to run the business or if the business will be sold or dissolved.
If Joe were to die, the court also steps in to perform the same function, except that any value that remains in the business after nine months to two years of probate where the business is without its primary driving force will be passed to the family members according to state law.
A simple business continuity plan has Joe creating an Estate Plan consisting of both a Revocable Living Trust and Powers of Attorney. Joe transfers his shares of stock to his Revocable Living Trust. Now in the case of Joe’s incapacity, his hand-picked successor trustee for his trust will have legal authority to run the business immediately without court involvement or intrusions. If Joe dies, again his hand-picked successor trustee for his trust will be able to step in immediately to run the business giving him and the family time to consider the important decision of whether to continue the business, sell it or methodically wind it down. It does not become a fire sale asset and it does not display any significant interruption in its products or services it provides to its customers.
When it comes to creating your business entity, consider using a professional service such as AmeriEstate who understands both the business formation as well as the Estate Planning aspects of forming, running and passing on your business.