For every business owner, the type of entity you choose can have long-term consequences, and will ultimately impact your business succession options. Many owners find themselves with significant assets tied to the business, raising questions as to how they can maximize value and best transition the other assets to intended beneficiaries. A New York business estate planning attorney at Pierro, Connor & Strauss, LLC can guide you through the process to provide for a smooth transition upon death, retirement or sale of your company. Our experienced team takes a “big-picture” approach, combining business, corporate, tax and  estate planning tools to ensure success for your business and your family.

Choosing the right entity for your business

Many small business owners seek to maximize liability protection, minimize taxes, and provide some continuity that complements their estate planning goals. One popular choice is to set up shop as a sole proprietorship or “DBA,” but as the business grows, so can the need for asset and liability protection. Having an idea of how big the business might get can make it easier to choose an advantageous entity type from the beginning. Limited liability companies (LLCs), partnerships and corporations are some of the most common choices, each offering different tax advantages and flexibility with regard to succession planning.

Business Formation Planning Team
Louis W. Pierro
Theresa M. Skaine
Ingrid Johnson
Kristen Peck

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LLCs

Limited liability companies have become one of the most popular entity choices, combining the best features of partnerships and corporations to offer both flexibility in management structure and asset protection. They are an advantageous tool for businesses and individuals that own real estate or rental property. Business owners receive “membership interests,” reflecting their percentage ownership, and enjoy pass-through taxation, avoiding the double taxation that affects C corporations. Although an S corporation also offers passthrough taxation, with an LLC, no limit is placed on how many shareholders there can be or the types of entities that can hold interests in the LLC.

If you choose an LLC for estate planning benefits, you may be able to avoid the compressed income taxes of trusts and allow flexible management of the assets while still reducing the taxable estate (by making property transfers to family members as gifts). From a business succession standpoint, LLCs allow business owners to control what will happen to the business both during and after their death through a carefully crafted Operating Agreement. The LLC is not subject to the rigid standards of the Business Corporation Law, and creative counsel can structure significant advantages into the Operating Agreement.

PARTNERSHIPS

Partnerships come in several forms, and the obligations and protections vary quite a bit. A general partnership can be formed without filing paperwork with the state, and the partners do not even need to have a written partnership agreement. However, general partnerships also do not protect the owners – each is liable for the debts of the partnership and is bound by decisions made by other partners.

A limited partnership (LP) is more structured and provides much greater protection to those partners who remain limited partners, but the LP must also have one or more general partners who manage the business and are personally liable for its debts and obligation. The personal liability of the limited partners is limited to the amount of property that they contributed to the business.

CORPORATIONS

Corporations are the traditional business entity that have been used to keep the rights and the obligations of owners and their businesses separate, creating a “corporate shield” for liability purposes. They can offer many benefits, but they also come with rigid legal requirements and for C Corporations the problem of double taxation. Because of this, many entrepreneurs find that LLCs are often a better fit, allowing greater flexibility while maintaining the “shield.” Some financing options prefer or require that businesses they fund be corporations, however, making it the best option for those businesses.

Details like the type of entities available and how the entity choice affects the business’s rights and responsibilities are determined by state laws, which also dictate what types of estate planning vehicles are available. Whether to form your business entity in New York, Delaware or another state is also of importance, as is selecting a New York business planning attorney to help you select the business structure and jurisdiction that will best fit your estate planning goals while complying with all relevant statutes.

Short- and long-term considerations in entity formation

While choosing a type of business entity based on how it suits your estate planning goals is wise, the entity choice will also have near-term consequences as well. For example, it can affect:

  • Paperwork needed for start-up
  • How both the business and its owners are taxed
  • How much flexibility is permissible in record-keeping and other administrative tasks
  • Whether the business or its owners can be sued
  • Who is liable for a judgment against the company
  • Who may invest in the company
  • Options for an exit strategy

When it comes to estate planning considerations, business entities like LLCs and corporations – unlike sole proprietorships – are legal “people” separate and apart from the individuals who own or manage them. Depending on the entity’s structure, this can mean:

  • Assets held by the entities may be subject to more flexible transfer rules
  • Transfers may be exempt from estate taxes
  • The entity’s ownership of assets may remove interpersonal conflicts that could arise if the assets were instead owned by the individual at the time of his or her death, disability, or retirement
  • The owner may not have the same ability to sell, divest, or bequeath the assets once they are titled to the entity

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Tools for carrying out your business and estate plans

Choosing the right business entity is not enough. To ensure that a business will meet the owner’s long-term goals, it needs to be set up and continued with care for its lifespan. Operating agreements and annual maintenance are two areas require special attention.

Operating Agreements

Unlike most other states, New York requires LLC members to adopt a written operating agreement. Operating agreements play an important role in the life of an LLC. They dictate the relationship among the members and determine what happens to the business if an owner leaves or comes into the business. This will not take the place of a will or other estate planning tools, but it should complement them. After the death of an owner, the operating agreement can guide operations during the weeks or months that the estate is pending.

Businesses that operate as a partnership must have a well-structured partnership agreement rather than an operating agreement. A partnership agreement serves the same purposes as an operating agreement and offers the same flexibility.

Maintenance

Annual maintenance typically includes conducting meetings, preparing minutes and resolutions, and documenting activity to confirm that your business is still in compliance with relevant statutes. Corporations and LLCs are required to hold annual meetings of owners. This is also a good time to review all of the business’s controlling corporate documents, as well as everyday operations. Any major decisions affecting your company should be authorized in writing, as potential lenders or buyers may want to see authentication. It’s a good idea to review operating agreements and bylaws every few years and make sure they are compliant with current laws. If new owners have entered the business, this should be financially and legally documented.

Business Formation and Succession Attorney

A business entity might sound good on paper, it may but not be the best choice in a real situation. Consulting a business and corporate lawyer with in-depth experience can help you put in place a corporate and estate planning structure that allows for your business’s immediate operations as well as for business succession.

The estate planning and business attorneys at Pierro, Connor & Strauss, LLC offer a full range of business planning and estate planning services, including:

  • Advising on business structure and drafting formation documents
  • Contracts, Leases, etc.
  • Serving as General Counsel
  • Preparing minutes, resolutions and conducting annual meetings
  • Buy-Sell Planning
  • Mergers and Acquisitions
  • Reviewing and constructions exit plans

Call us today to schedule an appointment to discuss your needs.

Pierro, Connor & Strauss, LLC provides legal services to clients in ten locations that include the Capital Region, New York City, Long Island, Westchester, Hudson, Utica, Lake Placid, Fort Lee, NJ, Falmouth, MA, and Clearwater, FL.

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Contact us today for a FREE consultation and we’ll be happy to help take the worry out of tomorrow so you can live today.

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