Legally, owning a business by yourself is a mixed bag. You face unique challenges when only you own and run a business while avoiding the potential downfalls of owning a business with others. Like all issues facing business owners, planning and being proactive may save you a lot of grief, money, and energy by avoiding legal problems or reducing their future impact. Below, our friends at Focus Law LA discuss wealth management for business owners.
Your Wealth May Be At Risk
If you’re a sole proprietor, that’s the simplest way to run your business, but it also has the most significant risks. There are no other legal structures involved. You own the business, make all the decisions, and all the net profits are yours. There are no co-owners to argue with, no partner to embezzle your assets or steal your ideas or customer lists to start a competing business.
However, when you own a business as a sole proprietor, your assets are at risk for liabilities like business loans, being cited by a government agency for legal violations, or facing a lawsuit filed by another.
A single business owner need not be a sole proprietor. You can set up an S-corporation or limited liability company or corporation (LLC) that adds a manageable amount of complexity while shielding your assets from future debt collectors or plaintiffs.
The structure you choose must be properly established and documented so a future party can’t successfully claim they’re a sham. If they can “pierce the corporate veil,” the protections afforded by an S-corporation or LLC will fall away, and your assets will be at risk.
When Bad Things Happen To Good Business Owners
A benefit of multiple owners is if one becomes ill, passes away, or is no longer interested in the company, the other owners can purchase their interest. This way, despite a part-owner’s absence, the company can continue.
If something happens to you, you may need to sell the business. You may be temporarily incapacitated, but the period may be long enough to jeopardize your company if someone else can’t run it for you. You need good employees who can do their jobs and one or two who can temporarily step in for you with little or no supervision.
Every business owner needs an estate plan, but this is especially important for a sole business owner. An ownership agreement between co-owners can discuss what happens after one dies, but you have no co-owners. What will happen to your business when you pass away, possibly much sooner than expected?
Are there family members willing and able to take over? Should the business be sold, and the proceeds go to family, friends, or a charity (or a combination)? If so, you’ll need a will.
Without a will, your business will pass to your next of kin, who may or may not want it. If you have more than one next of kin (you’re divorced and have multiple adult children, for example), they may disagree on what should happen to your company.
Another option may be to pass your ownership interest to a trust at the time of your death. The trustee would run the business to benefit the beneficiaries listed in the trust document. For example, you could name one of your children as a trustee (who would run your business or hire someone to do so) with profits benefiting your grandchildren, a charity, or both. You’ll have many options if a trust is right for you.
There are many more possible legal issues a single business owner may face. If you haven’t already done so, talk to your business litigation lawyer about your situation and develop approaches to manage your risks as effectively as possible.