We practice law in Smithtown on Long Island, and our general area is a good place to start a small business. And of course, there are many people that have been operating their own enterprises for years. In this blog post, we will provide some information that some local business people, and would-be business owners, may find to be useful.
Asset Protection Structures
Most people that start businesses are in a position to do so because they have some personal assets. When you are embarking into the unknown like this, you never know what the future may hold from a legal perspective.
If you go forward as a sole proprietor or a partner, your business assets are looked at as your personal assets. They would be in play if you are ever the target of a lawsuit. Because of this dynamic, you should definitely consider creating an asset protection structure to serve as your business entity.
Limited Liability Companies
One possibility would be the establishment of a limited liability company. When you have an LLC, the actions of your business and your employees cannot put your personal resources in jeopardy. If someone was to sue the limited liability company, they could only go after property that is owned by the LLC.
Conversely, if you are personally sued, assets that are held by the limited liability company would be protected. Along these lines, we should point out the concept of fraudulent conveyances. You cannot transfer your personal assets into a limited liability company after you know that there is going to be a judgment against you. This would be an illegal fraudulent conveyance. At the end of the day, the assets would still be in play, and you could face additional penalties.
Family Limited Partnerships
There is another very useful asset protection structure called the family limited partnership. If you were to establish this type of partnership, you would be the general partner. You would add family members to act as the limited partners, but they would not have any decision-making authority over the partnership. The general partner is the only member that can direct the actions of the partnership.
Assets that are held by the partnership would be separate from the personal property of the partners. If someone is injured on property that has been conveyed into a family limited partnership, the litigant would have to sue the partnership. All the property that is owned by the partners would be protected.
Plus, it is possible to establish multiple different family limited partnerships and place a single piece of property in each one of them. In this manner, you would limit your exposure, and you could also make sure that you do not have a great deal of equity in any property that is contained in any of these FLP’s.
Succession planning can be somewhat challenging for small business partners. To provide an example, let’s say that you have one business partner, and he is 20 years older than you. It is likely that he will pass away first, and you want to keep the business throughout your life. No one in your partner’s family wants to be involved, and you would not want to work with them anyway.
How is this situation resolved? The answer is that you and your partner could enter into a buy-sell agreement that is called the cross purchase plan. You get together and determine the value of a 50 percent share in the business. Each partner takes out a life insurance policy on the other, and the proceeds equal the agreed-upon value of a share.
When one partner dies, the other partner uses the proceeds to purchase the deceased partner’s share in the business from their family. The surviving partner can continue on as usual, and the family of the party has passed away would have liquidity that could be spread among multiple heirs.
Download Our Estate Planning Worksheet!
We have shared a bit of useful information in this blog post, but you can gain a more comprehensive understanding of the estate planning process if you download our worksheet. It has been carefully prepared by our attorneys, and if you take the time to go through it, you will be glad you did. The worksheet is being offered free of charge at the present time, and you can click this link to obtain access to the download