For many, planning for the worst means anticipating their death and preparing for it. When it comes to protecting their assets and business, there is no doubt that doing so is essential. But sometimes, the worst can occur well before death, with litigation threatening to strip away anything of value in the business, and even your personal wealth and savings if you are not careful. This article explains:
- How your estate plan can include a safer future for your business.
- How and why to think ahead about your exit strategy when creating a business.
- Four alarming examples of what happens when businesses do not plan ahead.
What Are The Legal Documents And Planning Steps Needed For Business Succession?
One of the big dangers facing any business is surviving its owner or creator. But with the right estate planning tools and documents in place, there is no reason to fear it.
For example, trusts can be used as a vital component of any estate plan. The legal entity or business of the client, such as a limited partnership interest, membership interest in an LLC, or stock interest in a C-Corp or an S-Corp, can be given in ownership to the trust.
At the same time, you draft both the business’s plan and identity with the succession you have in mind so that the trust and structure of the business work together, not against each other. The advantage of hiring a specialized firm like The Vermillion Law Firm is that we can build both, from the ground up, in total cohesion.
What Will Happen To My Business If I Do Not Take Any Estate Planning Measures?
If you do not have a trust, then the asset or business (the LLC membership interest or the stock interest in the corporation or partnership) will be subject to probate. Then, the terms of your last will and testament (if you even have one) will dictate how it is distributed. Often, the business will need to be split or sold to conform to them.
It is better for you to address exactly to whom and how the business will be passed on. Preferably, this is through a trust so it does not have to go through a complicated probate process. But the business is not the only thing that might be negatively affected by poor estate planning; any heirs or children might find themselves left out as well.
Take an example where a father wants to leave the family business to two of his kids who are working in the business. If the business becomes successful, the third child will feel like they were cut out unjustly. That is an opportunity for conflict at the time of the father’s death.
There is always a way to balance things out, but such issues are always best addressed in advance. In this example, the potential conflict might be alleviated by giving some other assets to that child who is not part of the business. But it almost always requires working carefully ahead of time to ensure the business will be passed on without having to undo it completely.
What Are Some Exit Strategies For Asset And Business Protection?
In a litigious society, asset protection is the name of the game. In Texas, we use LLCs frequently to shield clients because assets that are properly drafted and built into an LLC cannot be attacked by a judgment creditor. An LLC is an excellent way of preserving assets.
Creating an LLC is legal, but only if you do so in advance. If you undergo asset protection entity creation after the liability event has occurred, then your action can be challenged and the protection potentially undone.
How Dangerous Is It To Try Protecting My Assets After Liability Exposure?
A more local example involves a businessman who moved from Louisiana to Texas. He had already been sued as a co-signer of a note that helped a business get started In Louisiana. He was signed on as a silent partner, but when you are a signatory on a mortgage note, there is no defense. If the note is going to be sued, you will be held liable.
With the help of his personal attorney appearing in Texas, the man created a limited partnership, which gave him nominal asset protection for those assets. His attorney warned him that the creation of the limited partnership after the event of liability was an imperfect protection mechanism.
An aggressive, well-funded plaintiff who is willing to pay the fees could challenge the creation of the limited partnership as fraudulent because the liability event had already occurred. However, this makes the lawsuit very expensive for the plaintiff, and that will often keep them from moving forward.
As a result, the creation of the entity after the fact can sometimes work, but it is never as effective as planning ahead and creating the entity preventively rather than reactively. To do that, though, you need a top-notch business law team, such as The Vermillion Law Firm, on your side.
For more information on Planning For Business Succession In Texas, a free initial consultation is your next best step. Get the information and legal answers you are seeking by calling (972) 366-7201 today.