Business Succession Planning and Sole Proprietorships
Owning and operating a successful business is complicated, especially in the current economic climate. If you have a sole proprietorship, you face some unique challenges. The future of your company relies on you. Sole proprietors need a well-crafted succession plan to ensure that their financial interests are fully protected. In this post, our Charlotte estate planning lawyers provide a guide to business succession planning for sole proprietors in North Carolina.What Is a Sole Proprietorship?
As defined by the U.S. Small Business Administration, a sole proprietorship is “an unincorporated business owned and run by one individual.” Notably, there is no technical legal distinction between the owner of the business and the company. A sole proprietorship is known as a pass-through entity. Business income is passed directly through the company to the individual owner. It is then taxed at their personal tax rate.
Sole proprietorships offer some significant advantages to small business owners. Indeed, they are the single most common business entity in the United States. The Tax Foundation estimates that there are 23 million sole proprietorships nationwide. For reference, this means that there are more sole proprietorships than C-corporations, S-corporations, and business partnerships combined.Sole Proprietorships: Without a Succession Plan, the Business Automatically Dissolves
That a sole proprietorship is not technically a distinct legal entity is extremely important. Under North Carolina law, a sole proprietorship will automatically dissolve upon the passing of the business owner—unless there is a succession plan in place that makes some sort of alternative arrangements.
If you are a sole proprietor with dedicated no business succession, all of your business assets will simply be folded into your estate. They will be distributed to your heirs. If no arrangements have been made, this often means that the business is going to be dismantled. It could easily mean that a significant amount of money is being left on the table.Business Succession Plans for Sole Proprietors: Special Considerations
Every company should have a succession plan in place. The reality is that you never know what tomorrow is going to bring. A succession plan helps to ensure that you and your sole proprietorship is fully prepared for a future in which you might suddenly need to leave the business. Here are three unique considerations for sole proprietors putting together a business succession plan:
- Is the Business Viable Without You? Depending on the specific nature of your business, your sole proprietorship may or may not be viable without you. The very first question you need to answer is whether or not your company can continue to operate without you being involved.
- Is a Family Member or Loved One Going to Take Over? If a family member or other close loved one is going to take over your sole proprietorship, it is imperative that they are fully prepared to own and operate the business. As an example, imagine that you run a catering business as a sole proprietor in Mecklenburg County. Your child may be ready and willing to take on the business if you pass away. If so, it is crucial that you develop a succession plan to make that they have all of the tools needed to succeed.
- Are You in a Position to Get the Most Out of Your Business Assets? As you may already expect, many sole proprietorships are not transferred directly to other parties. That being said, it is still important to craft a succession plan that will allow your family to get the most out of the company’s assets. Consider again the example of a catering company as a sole proprietorship. A successful catering business may have a deep, well-developed customer list. Without a succession plan, that customer list may simply be passed down to your heirs who are not in a position to do anything with it. Do not let valuable commercial assets go to waste.
Your business is unique. A business succession plan should be customized to suit your needs and long-term goals. To be clear, a sole proprietorship does not necessarily require a complex business succession plan. A relatively simple, clear formal business succession plan can ensure that you, your sole proprietorship, and your family are best protected.Call Our North Carolina Business Succession Planning Attorneys Today
At Arnold & Smith, PLLC, our North Carolina business succession planning lawyers are committed to protecting the legal rights and financial interests of your clients and their companies. If you have any questions about business succession planning for a sole proprietorship, we are here to help. Contact us now for a strictly private review and evaluation of your case. We help sole proprietors and other business owners with succession planning throughout the region, including in Mecklenburg County, Union County, Rowan County, Davie County, and Iredell County.