Sole proprietor: an individual who owns, manages, is responsible for, and is liable for a business. A business or trade name usually must be registered in the city of operation and tax reporting may be required. Many a business begins this way.
passed along as part of his or her estate. Without a plan, whether a sole propietorship will
Partnership: a business owned by two or more people, usually by written agreement formalizing ownership, operational and management rights, responsibilities and liabilities. A partnership can take the form of a general, limited, or limited liability partnership; plans for continuation and dissolution are typically included in the partnership agreement.
leaves, or agree in advance to division of the assets if the partnership dissolves. Like a
Limited liability company (LLC): a business entity formed by contract among owners in which income flows through the business directly to owners, as in a partnership, but the owners’ personal liability is generally limited, as in a corporation.
Buddy was a widower who had a little engineering business he’d built by himself from the ground up. He built bridges and he loved his work—had all the equipment and twenty employees. His son Bill joined the business after college. Ten years later, when father and son had doubled the size of the company, Buddy was ready to retire. He wanted Bill to have the business and felt he deserved it after their success. “Not fair!” objected his sisters. “This is our family business—our business, not his.” Fireworks in the family! But Buddy knew what was best for business, and he figured out a way to make his plan work. He got organized, sought professional advice, and put his plan into action. He reorganized his business as a limited liability company that he and the whole family continued to own, with himself as silent partner and son Bill in charge at a salary. Buddy also bought a life insurance policy payable to Bill that would, when the time came, provide Bill sufficient funds to buy out the value of the business that his sisters would inherit under Buddy’s will and thus give them their fair share of the estate. Bill continued to run the business without the interference of his sisters, and Buddy lived to a ripe old age in peace. What might have happened? If Buddy had thrown in the towel when the kids disagreed, Bill might not have been able to buy out his sisters, and when Buddy died they would have been forced to sell the business to divide the estate. Or, Buddy’s daughter might have tried to continue to run the business with Bill…tough going for Bill at best and ruinous for all at worst. A family business is often the heart and soul of a family, and should be treated as such.
Corporation: a business entity created by charter from the state with rights and liabilities separate from those of its owners, shareholders, or “members.” By example, a business making faulty widgets that cause damage could affect the value of the business, and therefore the shareholder’s investment, but the shareholder is not personally liable. A Subchapter S corporation is a form often used for a small or closely held business in which a group of business associates, a family, or extended family has primary ownership and control. The income from an S corporation passes through the business directly to the owners, as in an LLC, though the owners are protected from liability by the corporate structure, or “veil.” Larger, public corporations, or C corporations, are taxed on corporate profits, and owner/shareholders are taxed on dividends received, a result sometimes referred to as double taxation. Ownership in a public corporation does not affect an individual estate plan except as a financial interest.
22
continue or close—“dissolve”—depends on what the heirs or beneficiaries decide. Other forms of business provide for continuing or closing under certain circumstances. A partnership agreement typically includes buy/sell terms for continuing the business. Remaining or surviving partners usually assume ownership of the share of a partner who partnership, an LLC will continue or dissolve under the terms of the agreement creating it. A corporation has the advantage of operating under bylaws adopted to ensure the continuation of the business even under a change in ownership.
All in the Family
The family camp: Apply family wisdom. Affluent families often use an LLC or corporate structure with defined ownership shares to preserve shared family properties including vacation properties—the old fishing camp, the island off the coast—for future generations. Any wise family can do the same.
Agricultural and farm land. Because traditional family farms have often been forced to sell in order to pay high estate taxes on land values, special tax exclusions are available to qualifying families continuing to farm their land. Establishing the correct agricultural business and ownership structure also offers valuable protection.