Welcome to another episode of the Good Steward Law and Wealth Podcast, where we equip you with strategies to safeguard and grow your wealth with intention and care. Today, we’re tackling a critical subject for business owners: managing business succession and setup. We’ll explore the different types of business entities, weigh their pros and cons, and cover the formalities of establishing them correctly. Most importantly, we’ll delve into strategies for creating a solid succession plan—whether through trusts, buy-sell agreements, or tailored operating agreements. If you’re a business owner, this episode is packed with insights to help you secure your legacy and protect your loved ones.

IN THIS EPISODE:

• [0:24] How to set up business entities in your estate plan
• [2:43] The advantages of an LLC and a new filing requirement
• [9:57] Passing your business to the next generation
• [12:02] Passing on inheritance equally among children
• [13:37] Having a Buy/Sell Agreement for a partnership to avoid problems

KEY TAKEAWAYS: 

• A Limited Liability Company (LLC) is often the ideal business entity, combining the liability protection of a corporation with the flexibility and simplicity small to medium-sized businesses need. Setting up an LLC involves choosing a unique business name, filing Articles of Organization with the state, and crafting an Operating Agreement—ideally with legal guidance—to define the company's structure and operations. This streamlined approach makes LLCs a top choice for entrepreneurs seeking protection and ease of management.
• Business owners have four main entity options: Sole Proprietorship, Corporation, Partnership, and LLC. LLCs are often the top choice for small to medium businesses, combining strong liability protection, tax flexibility, and easier upkeep than corporations.
• Use trusts to avoid probate, ensure fair distributions among heirs, and maintain operations. For partnerships, establish buy-sell agreements funded by life insurance or other methods, with clear valuation strategies for smooth transitions.

RESOURCES:

L. Jennings Law - Website

L. Jennings Law - Facebook

Ledly Jennings - LinkedIn

L. Jennings - Instagram

L. Jennings Law - YouTube

ABOUT THE HOST: 

Attorney Ledly Jennings, founder of L. Jennings Law, specializes in protecting legacies and ensuring smooth transitions of personal and business assets. With offices in Arkansas, his firm offers expertise in estate planning, elder law, probate, and business planning. With a J.D. and MBA, plus valuable experience at Stephens, Inc., the state's largest investment bank, Ledly serves high-net-worth clients and family businesses statewide.

to the Good Steward Law Wealth Podcast, where host Ledley Jennings explores law and finance to help listeners become better stewards of their wealth. Each episode covers the latest trends and strategies in estate planning, elder law, investment, and wealth management. Tune in for the knowledge and tools for financial success and security.

Ledly Jennings: Welcome back to the Good Steward Law Wealth Podcast, and today we are going to talk about the Business entities and how to set them up in your estate plan. So, um, we'll start out with talking about the types of entities that a business owner can have. Then we'll get into which one's the best, what are the pros and cons of those.

Um, you're running it as an extension of yourself. There's really no business entity. It's just. You, the other option you hear about a lot are in corporations. So, um, you see at the back of business names, that's a corporation. Um, that is one option. Another option is a partnership. It could be a general partnership, a limited partnership, but it's you and partners.

Um, it's still in y'all's name and y'all form a partnership, meaning y'all work together. Um, and then the final option we really talk most about is an LLC. Also known as a limited liability company. Um, and that is the most common, um, business entity that we see today. And that's changed over the last, I don't even know when it is since I've been a lawyer, it's been the most common, but it wasn't always that way.

If it's a large publicly traded company, because mostly corporations have a lot of hoops to jump through. There's a lot of administrative issues. Um, and there's a lot of formalities that have to be followed to have a corporation. So basically all that to say is. The best entity to use nowadays is a limited liability company, an LLC.

Um, so an LLC is taken over as kind of the main entity that we use today. And I almost always recommend, especially my type of clients. I'm not representing big publicly traded companies. These are business owners, um, LLC is what they set up. Now I'll. Preface this. You should almost never have a sole proprietorship as your business entity.

If it is, then you can file, um, they call it your articles of, uh, we'll really just call it articles. Typically you file your articles and that is you saying, you know, the name of the company, um, who the owners are, address, register agent, you list all that and you pay the filing fee with the state when you're approved.

They will send you a certificate and your articles, and that is your state documents. Um, And then from there, you set up an operating agreement. So basically this is where the attorney typically is valuable. They come in and create an operating agreement that is, acts as the bylaws to your company, you know, what, who's in charge, who are the managers?

So you will file and get a tax ID, also known as an EIN with the federal government, and all that is what you use to open a bank account. And once you open the bank account, you're up and running. That is your business. Um, Now I will hit briefly on a new filing requirement with a business entity that not many people know about.

It was enacted this year. Um, anytime you open a business or if you already own a business, you have to file what's called a beneficial owner report. Um, it's through a government agency called FinCEN. And basically you get online, you file, fill out this information to say, who are the owners of this company?

That's why I always recommend calling an attorney to know how to do these things and they will take care of it for you. Um, so you have to fill out beneficial owner report as well. And the details of how you fill that out and you know, what are the requirements is room for a whole nother episode that we may do eventually.

But just know that you have to fill that out. Um, so once it's set up. You have to follow certain formalities to achieve the protections of an LLC. So you have the approval with the state, you have the operating agreement and you have to maintain that validity with the state. So you have to pay your franchise tax every year in Arkansas.

You're meeting with your shareholders, even if that shareholder is just you or you and your spouse, you'll need to have a meeting and you need to document it. Now, why do we have to go through those formalities? Because. If you're ever sued for any reason, every attorney will start with trying to, they call it pierce the corporate veil is show that this entity that you have set up is not a real entity and you're not following the formalities.

So they will try to get through the LLC, pierce the veil and get to you personally. And we don't want that. We, that's why we set up the LLC. We want asset protection. So you want to follow all the formalities so you can show, yes, we set it up the right way, we've maintained it. We have a bank account.

And by that, I mean, there's a few options on how you tax an LLC. One, it could be a disregarded entity, meaning it's taxed as you personally, um, same way you file your taxes today. It just taxes through you. Another one is as a partnership. It was taxed just like a partnership. Um, one is as a C corp. So you can tax an LLC as a corporation.

I need to know what type of businesses it is. So I say, would you have an LLC? They replied, no, I have an S corp. Um, that is not a. Accurate statements. So an S cork is a tax election, but your entity needs to actually have a structure to it. And that structure is usually an LLC. Um, sometimes it's just a sole proprietorship and they are electing to be taxed as an S cork, but you need to know the difference that first you have the entity, you have the structure that owns your business.

Which is an LLC, and then you elect the tax election. So try to get clear on that. If you are not sure, ask your CPA, Hey, do we just elect this election or do I actually have an LLC set up? Um, and it can vary. So you want to make sure all the formalities are followed. So you get the protection that you signed up for.

with the Well, typically when I start talking with a business owner, we usually start with a revocable trust because you can't pass on a business outside of probate unless you have separate agreements in place. And usually if you're the sole business owner, there's no one to pass the business on to because there's no partners in that operating agreement.

So maybe you leave the business to your son who acts is trustee and manages the company. He runs it, but your wife still gets the benefit from it. Or maybe there's a lot of assets in the business when you die, like equipment, real estate, that kind of thing. So your trustee immediately takes control and can then sell those assets and liquidate the business in a responsible manner.

Um, so your wife gets the income and the access to everything to maintain her lifestyle. So basically when you assign a business to a trust, it just gives you the ability To not interrupt operations, that business, when you pass away, someone can immediately step in as manager. And that's important to do because if you do not have this in place, your business will get stuck in probate.

Um, Now, let's, let's think that same situation with a single business owner. If they want to pass on their, um, business to their kids. You know, a lot of times I see this a lot with family farms. You have a son that is involved in the business, wants to continue farming, relies on that for his income, but you have a daughter or another child that is not involved in the farming business.

They're off doing something else with their career. Most of the time, parents want to provide for each of their kids equally, but, um, they want to make sure that the son gets the business. So. One instance where we start is evaluating, how do we, how do we make this equal? Let's say we, you pass away within your trust.

My son gets this value of a million dollars. My daughter gets life insurance or a retirement account of that equal value. Whatever's left, they split it equally. Um, you can hire a business appraiser or you can just name a value on that business each year. Or you can say, let's look at the last three years of revenue and get a multiple of that to decide how we value that.

The business, but there, it gives you a lot of options to within a trust. Once your business is assigned to that trust of how you distribute things fairly and equally. Now let's talk about another scenario where you own a business with a partner. So you have another partner, not in the family, just a business partner.

So all of a sudden you've got business owner two, that is now partners with business owner one spouse. And that is not what they signed up for or an even spouse. It could be kids. Um, so a lot of times we start talking about what is called a buy sell agreement when you have partners. I think every business owner needs to have a succession plan in place.

And if you have partners. That can usually be some sort of buy sell agreement. So what is a buy sell agreement? Well, it's an agreement for one partner to buy one partner to sell and vice versa. They each agree to buy and sell their shares. If something happens to the other, um, practically speaking. Say owner one passes away, they have a buy sell agreement in place, meaning owner two pays owner one's estate a certain amount and buys out the business.

Um, and by sale agreements can happen upon different, uh, occurrences. One obviously is death. So if one owner passes away, another is disability. Um, if they are disabled for a long time, can no longer contribute to the business they need to be bought out, um, or retirement, um, let's start with death. So we mentioned how it works, but how is it funded?

And let's say the business is worth 4 million. So when one owner passes away, his half is worth 2 million. So they take those life insurance proceeds, buy out the other owner's share. And the new owner owns it solely. So it's funded by life insurance that was paid for by the company. Neither party is technically out of pocket for it.

It's all paid for by the company. Um, there's tax benefits with that, but it's clean and clear. Now, sometimes people wait too late or maybe it's just not their health. Isn't it a good, um, situation where they can qualify for good life insurance at a good rate? Um, So then we start talking about other options.

Most commonly what I do is you look at the last three years of financials and pick a multiple of revenue. So that's how you agree on the value. So you're not, if you die after a really good year or a really bad year, your spouse is typically fairly compensated because you're looking at the last three years.

Um, that's what I do a lot of times. And I've had this in place for clients too. Upon retirement, I have a business that was, you know, maybe there's six owners. Um, One of them, a few of them are active in the business. One decides he wants to retire. How does he get bought out of the business? We look at that last three year multiple.

Maybe you do have a partner, but your son wants to take over your share of the business, as long as the other partner agrees to that, we can put that in the bylaws that that's okay, that a trust can inherit interest and management can pass on within a certain number of people or certain family members.

So. The takeaways for all this is set up an LLC for your business, follow all the formalities, get it set up right. And then once you have it set up, right, make sure you have a succession plan in place. Come talk to me. We can bounce around the different ideas of the best methods. There's all kinds of methods.

Thanks for listening.

Narrator: Thank you for tuning in to the Good Steward Law Wealth Podcast. If you're ready to take control of your financial future, visit GoodStewardFirm. com to book a meeting and sign up for our newsletter.