As a sole proprietor, you and your business are the same. When you die as a solopreneur, so does your business. It may sound harsh, but it's the truth. When you die, your family will have to sell any assets of the business (if you have any) to pay off debts. Anything left will be distributed according to your will. There will be no more income to support your family, and if your debts are substantial, your family gets nothing. That is a horrible result.
But you can change that outcome with some proper estate planning.
Create a Business Estate Plan
If you own a business yourself, all of your assets will be tied to the business. Not only do you need to determine now what will happen to your business when you die, you need to provide for your family—especially if they rely on your business income and salary.
That's where a business estate plan comes in.
There are certain components you should include in your plan to protect your family and your business once you're gone.
Life insurance can be a game changer for a sole proprietor, especially if your revenue is the primary income source for your household. A life insurance policy provides funds for your family to live on once your income is no longer available. In addition, if you have a business partner, the money from insurance can be used to pay your partner or buy out your interest.
Don't make your family wonder where all of your documents are, what's in your queue in your business, or how to get things done. Organize your paperwork now. Include:
- Operations manual that outlines everything you do in your business as a sole proprietor.
- Organized customer list and database, whether in a note program, Excel, or CRM.
- List of your passwords for banking and any websites, such as your business website.
- Folder of important business documents and legal documents, including contracts, leases, or operating agreements.
- Durable financial power of attorney in case you are unable to make business finance decisions yourself.
- Complete personal and business estate plan. A trust can be a lifesaver for those a sole proprietor leaves behind.
Emergency Bank Account
When you die as a sole proprietor, your assets may be tied up for weeks or even months. Leaving an emergency bank account for your family to access for cash to pay immediate bills will provide much-needed comfort during their time of grief. That financial cushion also provides time to make decisions calmly without having to rush around trying to figure out how to keep things in place until decisions can be made about what to do with the business.
This may be the simplest thing to do but the hardest to get done. Sit down and take the time create an instruction document for your family. Tell them where your important documents are. Leave them information about what must be taken care of immediately. Avoid leaving your family in the dark about what to do at a time when they are in the middle of grieving. If they have such a document or checklist, it will make it easier for them to step in and keep things running until they can get a handle on what to do.
For a Sole Proprietor in an LLC
All LLCs should have an operating agreement. Even single-member LLCs. In the state of Arizona, if you do not have an operating agreement, the state will provide one for you. That state mandate may not be what you want, though, especially if the LLC needs to be immediately dissolved and the assets disbursed.
Your operating agreement should say what happens in the event you or another member of the LLC (if there are others) dies. A sole proprietor needs an operating agreement just as much as a larger business does.
Get Help with Your Business Estate Plan
As a sole proprietor, your business means everything to you and your family. Make sure you protect it and them by planning now for your passing. Contact us. We have extensive experience in developing plans and ensuring that your wishes are fulfilled.