Most businesses will fail in their first two years. Many of these businesses, and probably yours, carry a high level of personal risk for their owners. If you are not using the correct entity for your particular business, you may end up being personally liable if the business fails. Do you want to expose your home, car and other assets? How about the assets owned by your spouse or their paycheck from a regular job? Selecting the correct entity for your business prevents such nightmares from occurring. More importantly, you can sleep at night knowing that the worst thing that can happen is losing your investment in the business, not your home.

Business Structures

There are a number of business structure options that exist in the modern corporate world. Following is a short explanation of the most common business structures.

Corporations

Corporations come in two basic forms, a “C” corporation and an “S” corporation. There are a variety of differences, but the central one is a tax issue. Briefly put, “C” corporations are taxed on their revenues and you are then taxed separately on any money you take out of the corporation. An “S” corporation “passes through” all taxes to the shareholders with the information being reported on your personal tax returns.

Regardless of the tax classification, a corporation is considered an independent entity from a legal standpoint. This independent status acts as a shield between the activities of the business and your personal assets. As a practical example, Kmart recently filed bankruptcy. The individual shareholders were not required to file bankruptcy and lost nothing more than their investment in the stock of the company. Forming and using a corporation for your business activities will protect you so that your personal assets will not be wiped out if the business fails.

Limited Liability Company

A limited liability company, or “LLC” as it is better known, was a very popular entity choice in the early 1990s. LLCs are similar to corporations, but can be taxed as a partnership. In California, the LLC can have either one owner or two. Regardless of the number, these owners carry the legal title of “member.” The LLC provides a shield for your personal assets just like a corporation.

General Partnerships

General Partnerships are very common and are just what the name implies – two or more people working together in a business venture. Unfortunately, many business owners form partnerships and don’t even know it. This occurs when they go into business with another person. If no business entity is formed, the law considers the business to be a partnership and treats it accordingly.

Partnerships are dangerous for one primary reason: a partnership does not provide any protection from liability and, in many ways, invites personal liability. Under well-established law, most partnerships are classified as “general”. This simply means that all the partners are contributing to the administration and running of the partnership business. This classification can have grisly results.

In a general partnership, each partner is jointly liable for the debts of any other partner arising from the business. For instance, you and your partner go to a business dinner with a client. Your partner has a drink and then a few more. They then get into an accident on the way home. Each of the partners is liable for the damages claimed by the injured people. That means YOU! Even if you were not in the car, did not rent the car, never saw the car and don’t drink!

Partnerships are a recipe for disaster. Stay away from them whenever possible.

Limited Partnerships

Limited Partnerships ["LP"] are perhaps the most misunderstood business entity. A limited partnership is similar to a general partnership, but allows a number of the partners to limit their liability by being limited partners. It is critical to note that these limited partners are restricted to simply making a capital [cash, content, equipment] contribution to the partnership. They cannot be involved in actively running the business. If they are, they lose any protection from partnership debts. Many limited partnerships end disastrously. If you are married to the idea of pursuing a limited partnership, you must do so in combination with corporations. That particular strategy is well beyond the scope of this article, but feel free to contact me if you wish to pursue a limited partnership.

Business owners should protect themselves by forming entities for their business activities. The real issue is identifying the structure that is best for your particular situation.

Probate is one of the most common and least understood legal proceedings. It basically comprises the settlement of all financial matters pertaining to the estate of an individual after their death. This includes paying any outstanding debts or tax liability, collecting any amounts due to the estate and, where necessary, determining the validity of the decedent’s last will and testament. If no will is found, the probate process typically includes a fair and equitable division of assets among the heirs of the deceased person; in community property states, the entirety of the estate passes to the spouse and no probate proceedings are required. Typically an administrator is appointed to handle the legal and financial concerns of the deceased; this individual is known as the executor, and deals with all administrative concerns relating to the disposition of the estate.  When there is no will, the probate process is much more difficult and expensive.

Normal Probate – The probate process is generally lengthy (see below for exceptions) - lasting up to a year or more, and typically begins with the appointment of an executor or administrator. Executors are usually specified in the will of the deceased. The executor’s first act is usually to file a Petition for Probate of Will and Appointment of Executor; a hearing is then scheduled to review the will and to approve the selection of executor. Once the will has been certified as genuine, the executor is usually approved to begin the probate process. If no will exists, then an administrator is appointed by the probate court to handle the financial affairs; usually this is a family member or close friend. Both executors and administrators are paid an hourly fee for their services.

The initial stages of the probate process involve itemization, inventory, and appraisal of all assets belonging to the estate. This includes real estate, bank accounts, investments, life insurance policies, and all other items of value that constitute a financial asset. Some assets, including antiques, motor vehicles, and real estate holdings, require a professional appraisal of their value before they are added to the total worth of the estate.

Debts and liabilities are also assessed; typically, these financial responsibilities are dealt with in a predetermined order. A small allowance is sometimes paid to the immediate survivors, including the spouse and children of the deceased. After that, administrative costs are paid first, including the fees due to the executor or administrator. Funeral expenses and burial costs are dealt with next, followed by all other debts and claims. Pending lawsuits against the estate are typically paid after they are decided in court, although a settlement may be offered at any time during the probate process.

Once all outstanding and pending debts have been paid and a legally-required waiting period has elapsed, a final settlement is approved by the probate court and the remainder of the estate is distributed by the executor in accordance with the will or, if there is no will, the administrator makes distribution in accordance with the applicable state law. At this point, the assets of the estate may be directly provided to the heirs in their original form as real estate, financial securities, or other assets, or those same assets may be sold and the proceeds distributed as required by the provisions of the will or state law. This final disposition concludes the probate process and dissolves the estate as a legal entity, allowing the survivors of the deceased closure on the inheritance process.

Expedited Probate -There are expedited processes for going through Probate in Texas which are available to Estates that have a will and do not have any debts or other reasons that necessitate administration.  Many small estates can qualify for this type of probate and even large estates which don’t have debt or other complications.  These expedited probates can be completed in a much shorter period of time – sometimes in as little as a month with only one court appearance.

No Probate – To avoid Probate altogether, you can establish a Trust during your life and move your assets into the Trust before your death.  This is especially helpful if you own real property in more that one state – thus requiring probates in two different states when you die.  If you establish a trust during your lifetime and put the properties in the trust, you will not have to go through probate in multiple estates.  This can save significant money to your estate as the cost of setting of a trust is usually less than the cost of even one probate proceeding.

Free consultation – If you have questions about Probate or Trusts – or would like to know if your estate or one you are handling qualifies for expedited probate proceedings, call me to set up an appointment for a free consultation to discuss your situation.