In sole proprietorship the business and the owner are seen as inseparable. Often this is not only due to the fact that the owner possesses some sort of special or essential skill that the business has been centered around, but also legally the IRS confirms this by how taxes are assessed on these entities. All personal profit and expenses of the owner are seen as the businesses as well. It would make sense then that when the owner ceases to exists the business must cease with them. Many sole proprietors overlook the fact that their family or partners can not legally continue the business and likewise the revenue they were depending on to maintain their standard of living.

Why does a Sole Proprietor need business succession planning?

In the absence of a funded plan, this leaves heirs and surviving partners with one option, the business must be liquidated for cash. This means the heirs are attempting to sell off the assets of the business in return for some sort of cash consideration for the business interest. This involves lining up a market, buyer, and satisfactory price, all of which can take time and result in financial loss. If the surviving partner would like to take over completely, they would still owe the deceased’s estate consideration for that share of interest. Once assets have been sold, a portion of that money would be needed to clear up any outstanding debts of the aforementioned business.

The Business Succession Plan

A Buy-Sell or Income Replacement plan funded by life insurance solves several concerns for the sole proprietor. First, it provides the heirs with immediate consideration to not only resolve any outstanding business debts but afford the time it would take to find a buyer of the assets or the business itself. This cash consideration will serve as a replacement of the future income that would have been generated if the operator was still alive. This contract will also provide legal direction for the assets so that matters of probate can be avoided. Lastly, a would be buyer of the business or its assets would need a source of cash to actually make this transaction. A agreement funded with life insurance provides that cash on a tax-free basis with a timely payout.

Many business owners falsely believe that family or general partners would be able to seamlessly assume control of the business. As mentioned above, this is legally not possible unless specifically designated by the courts. In the rare case this is court mandated, the new owner would be immediately responsible for all debts and liabilities of the previous owner. If the previous owner desired for investment funds to be used to facilitate these transactions, this would create another tax liability due to the capital gains and income taxes that would be assessed.

Sole Proprietorship is one of the most popular business entities in Maryland and the United States. Owners often choose this as the initial structure during the very hectic first years of operating. One of the more commonly overlooked elements to a new business are risk management and succession plans. It is our company’s goal to make mitigating these risks a easy and comfortable process for the time restricted owner.