Santa Clara Business Planning Lawyer Answers: What Happens to Your Sole Proprietorship When You Die?

Sole proprietorships are a common type of ownership interest where the business owner and the business are the same legal entity. The business owner of a sole proprietorship is personally responsible for any debts the business incurs. However, unlike a corporation, the sole proprietorship belongs to one person and is legally a business indistinct from that one person. Once the sole proprietor dies, the business does too, creating the following estate planning problems:

Problem One: The business’s assets go into your estate. Your business is legally no different from you, even if your business has a storefront, employees, and assets that are clearly not personal, like manufacturing equipment. If you die with a will, anything you use in business that you can will to your heirs will go to them eventually. If you die intestate (without a will), your business will go into probate for months or years, and your business assets will be distributed according to the laws of the state.

Problem Two: Your business creditors can go after any part of your estate. If you owe money to any entity, they’ll get first crack at your estate. Say you have a bad year. You’re $30,000 in debt, and your business doesn’t have enough assets to cover the costs. If you die with this debt, almost anything in your estate may be liquidated to cover business debts, including your house.

Problem Three: If your heirs run the business, they may run into legal problems. Your heirs or your estate might be vulnerable to lawsuits if they try to wind down the business themselves. In California, your business dies with you, and there may be legal problems if your heirs run the business as if you hadn’t died.

Fortunately, there are solutions for owners who wish to close or pass their business down in a more responsible way. They include:

Solution One: Create a trust to wind down the business. A Santa Clara business planning lawyer can help you create a trust for your sole proprietorship so that upon your death, the trust gets the assets, and the administrator of the trust can wind down your business and have any remaining assets go to your estate. This may or may not be available, depending on the type of business, so check with a Santa Clara business planning lawyer first.

Solution Two: Create a buy-sell agreement effective upon your death. In California, you may be able to create a buy-sell agreement with someone, like your adult children, to go into effect upon your death. Your estate lawyer can help you create this agreement. Essentially, you agree in advance on the terms to sell your business to someone, but you continue to own and run it during your lifetime. When you die, the sale is complete. They can stay in business, or they can shutter it.

Solution Three: Incorporate your business and will your shares to your heirs. A safe way to make sure your heirs get your business without losing an inheritance from your personal estate is to incorporate, or form an LLC, before you die. This makes your business a distinct legal entity, and you can own some or all the interest in the corporation or LLC. Your Santa Clara business planning lawyer can draft your estate plan so that you can leave any portion of the corporation to your heirs as you see fit.  Incorporation also may or may not be available, depending on the type of business, so check with a Santa Clara business planning lawyer, first.

If you have additional questions about passing down your business to your loved ones following your death or incapacity, we invite you to schedule a comprehensive planning session with our Santa Clara business planning lawyers. Simply call (650) 422-3313 and mention this article to schedule an appointment.