Sole proprietors need business estate planning, possibly more than other business entities. Sole proprietors need more protection because their personal assets are not actually separate from the business. That means, where you pass away, your business cannot continue unless you have a business estate plan in place. Unless you provide a specific plan of action in place, your expectations for business succession may not be realized.
Why a business estate plan is essential
All businesses involve risks and all business owners are exposed to legal or financial risks, as they operate their businesses. Starting a business, in itself, brings a certain amount of financial risk. The reality is, not all business owners recognize ever risk, legal or financial, to which they are exposed. Every legally binding agreement that you enter into has its consequences. With an appropriate business plan, you can reduce financial and legal risks.
What makes a sole proprietor different?
When the owner of a sole proprietorship dies, the business will cease to exist unless a successor takes over. Unlike corporations and partnerships, a sole proprietorship does not have a separate legal existence. Instead, the tax obligations and debts of a sole proprietorship are linked to the owner of the business. Either the business will dissolve or ownership must be transferred to someone else. If you want your business to continue, you have to create a business estate plan to make sure that happens.
Estate planning issues faced by many sole proprietorships
One particular concern for sole proprietors is how to protect their family’s financial future. For that reason, most sole proprietors include terms in their estate plans that direct the sale of the business or that appoint a relative to take over business operations. There are often tax consequences when a sole proprietor passes away. Without the proper estate plan, business assets will pass on to the next generation with significant estate and inheritance tax consequences. This is why it is so important that the business assets of a sole proprietorship be included in your general estate plan.
Ways to protect your business assets
One important aspect of business planning, and particularly asset protection, is liability insurance. They type of insurance you will need to provide appropriate protection for your business assets depends on the status of your business. Your insurance needs will likely change as your business develops. Adding an umbrella policy to your standard liability insurance coverage is wise because it provides individual protection, as well as homeowner’s and auto insurance coverage. Another way to provide asset protection for business owners is to establish a pension plan.
When you should establish a business plan?
Before there is any indication of financial or legal issues, you need to take affirmative steps to protect your business assets through a business estate plan. In additional to being a very prudent decision to make for your business, creditors have a more difficult time challenging any transactions or asset transfer you make. By completing your business plan early on, there are always more options available to head off any potential financial problems. If you have questions regarding sole proprietorships, or any other business planning needs, please contact the Schomer Law Group either online or by calling us at (301) 337-7696.