Small business owners have retirement and estate planning decisions to make. In this post, will take a look at three distinct pieces to this somewhat challenging puzzle.
LLC for Asset Protection
If you conduct business as a sole proprietor, your personal property and your business are intertwined as one entity. This is risky, especially if you are in a business that leaves you vulnerable when it comes to legal actions.
There are two widely used asset protection structures for small businesspeople, and one of them is the limited liability company (LLC).
When you establish an LLC, you separate your personal property from your business. If someone sues the business, in most cases, your personal property would be out of reach. The same dynamic applies in the reverse manner if you are personally sued.
We use the qualifier “in most cases,” because the protection is not absolute. If you personally guarantee a loan that will be used for business purposes, you are on the hook. Plus, if you cause damages in the course of doing your job as the owner of an LLC, you would be vulnerable.
In addition to the asset protection, there is another benefit when it comes to the way that an LLC is taxed. You claim profits and losses on your personal income tax returns, so your accounting is streamlined, and there is just a single layer of taxation.
Family Limited Partnerships
The other asset protection structure that we will look at here is the family limited partnership (FLP).
If you establish an FLP, you would be the general partner, and the family members that you add to the partnership would be limited partners. As the general partner, you would have sole decision-making authority.
In a general sense, the asset protection follows the same model as the limited liability company. Property that is held by the LLC is separate from the personal property of the partners.
To provide an example of the asset protection in action, let’s say that you convey an income producing apartment building into a family limited partnership. Someone is injured in the building, and they file a lawsuit.
They would be suing the FLP that is the owner of the building, so the personal property that is owned by all the partners would be protected. Conversely, if a partner is sued, the building would be protected.
In addition to the asset protection, family limited partnerships are useful for high net worth families that are exposed to estate taxes.
Succession and Estate Planning
You should have an exit plan if you are a small business owner. One approach that is commonly used by small business partners is the utilization of a buy-sell agreement.
The partners work together to determine the value of a share in the business. When the agreement is used for estate planning purposes, the partners would take out life insurance policies on one another. They would pay out the agreed-upon value of a business share.
After the death of one partner, the proceeds from the insurance policy would be utilized to purchase that share from the estate of the deceased partner. These agreements are also used for exit planning purposes without the insurance policy component.
Small Business Retirement Plans
Small business owners do not have the luxury of participating in the 401(k) plans are offered by large employers. However, they do have options for themselves and their employees.
There are self-employed 401(k) plans, along with Simplified Employee Pension Plans (SEP IRAs) that can be ideal if you have a few employees. The Savings Incentive Match Plan for Employees (SIMPLE IRAs) can be used by businesses that employ as many as 100 people.
Schedule a Consultation Today!
If you would like to discuss small business planning with a Memphis, TN estate planning lawyer, our doors are open. You can send us a message through our contact form to request a consultation appointment, and we can be reached by phone at 901-763-2500 or 866-997-6325.
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