For many people, owning a business is a dream come true. You can do something you really enjoy, and you are your own boss. As they say, when you like what you do, you never work a day in your life.
In order to live this American dream with peace of mind, you have to take the proper steps to protect your assets. Even if you try to do everything right, events that are out of your control can sometimes lead to lawsuits and creditor disputes.
If you take the right steps in advance, you can protect what you earn.
Family Limited Partnership
When you establish your business, you should choose the right asset protection structure. One commonly used legal device is the family limited partnership (FLP).
An FLP is made up of the general partner and limited partners, and they will all be members of the same family. If you create the partnership, you would be the general partner. You would bring in family members to act as limited partners.
There would be no loss of control because the general partner would retain sole decision-making authority. The best way to explain how it works is to provide a simple example.
Let’s say that you own a restaurant, and you want to protect your personal assets. You could convey the restaurant into a family limited partnership. If someone files a lawsuit because they were injured in the restaurant, they would be suing the FLP.
Your personal property and the personal property that is owned by the general partners would be protected. The same thing is true of most creditor claims that may be made after the partnership has been created.
On the other side of the coin, if any partner is personally sued, the restaurant would be protected.
There is also an estate planning benefit. If you intend to leave the restaurant to members of your family, you could give them majority shares in the partnership over time. This would enable an efficient transfer when the time comes, but you would hold on to the decision-making power.
Limited Liability Company
Another option that a lot of people choose is the limited liability company (LLC). You could make your business a limited liability company, and this would keep your personal property separate from the actions of your business.
In addition to the asset protection, you would enjoy pass-through taxation when you have a limited liability company. You would still claim business profits and losses on your personal income tax returns, and this would streamline your accounting process.
Small Business Succession Planning
There are some other moves that you can make to address estate planning issues as a business owner. If you have a business partner, you can enter into a buy-sell agreement called the cross-purchase plan.
First, you and your partner would agree on the value of a business share. You would then take out insurance policies with payouts that equal the value of a share.
When one partner dies, the money that is paid out by the insurance company will go to the surviving partner. Through the terms of the buy-sell agreement, these funds would be used to buy the deceased partner’s share from their family.
The remaining partner would be able to run the business, and the family would have cash that could be spread around according to the wishes of the deceased partner.
Personalized Planning Is Key
There are different approaches that can be taken to protect assets and address succession. The ideal way to go forward will depend on the circumstances. It is important to discuss your options with a licensed attorney so you can make the right choices.
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You put in a lot of effort over the years to build your business, and a lot of passion and love goes into it. When you choose our firm to help you put a plan in place, you can be absolutely sure that we will go the extra mile for you in every way.