Estate planning can protect assets from taxes, control how your assets will be distributed and much more. Everyone can benefit from a proper estate plan, no matter your wealth or status. This is also true for small businesses and family-owned businesses. Understanding why small businesses need an estate plan will help you in making decisions on how to organize your business and plan for succession of that business.
Estate tax consequences for sole proprietorships
If you are a sole proprietor, you know that your business assets are considered your assets, as the owner. Therefore, when you die, your business assets will be lumped together with your personal assets, even if those assets are owned in the name of your business. If you owned non-liquid assets, such as property, vehicles or machinery, the fair market value of these assets will be included with your personal assets for federal estate tax purposes.
Estate tax consequences for an S-Corporation
It is very common for small businesses and family-owned businesses to organize as an S-Corporation, because of the corporate creditor protections that are available. An S-Corporation must have less than 100 shareholders and only one class of stock. With a family-owned S-Corporation, if one sibling owning stock in the business dies, the value of those shares will be included in the deceased sibling’s taxable estate. Good estate planning can help to reduce the valuation of an S-Corporation, which will in turn reduce the decedent sibling’s taxable estate.
The value of Family Limited Partnerships and LLCs
There are two types of business structures commonly used in estate planning, for the purpose of holding title to business/personal assets, in order to decrease the value of an owner’s taxable estate: Family Limited Partnerships (FLPs) and Limited Liability Companies (LLCs). These two business structures allow the general partners to maintain management and control over the business assets, while still allowing gifts of the value of the assets to their heirs. These structures are very beneficial to small businesses and families owning a substantial amount of real estate, but who want the land to stay in the family for generations.
There are other estate planning options for small businesses
These are just a few examples of business structures available. As each type of business has its own advantages and disadvantages, it is important to discuss your business plans with an estate planning attorney so you can find ways to maximize your assets throughout your lifetime and ensure they are properly distributed after your death.
If you have questions regarding small businesses, or any other business planning needs, please contact Sexton, Bailey Attorneys, PA online or by calling us at (470) 443-0062.