Asset Protection Strategies As You Grow Your Business

Hey business owner! You, yes, you. What happens to your company when you die?

By Karen Johnson

Hey business owner! You, yes, you. What happens to your company when you die?

Do you have an LLC, a C-Corp, an S-Corp, a Partnership? Do you have an Operating Agreement, Articles of Incorporation or did you just fill out a form online to create your company and you have none of those items? Does your business partner obtain the right of first refusal when you die? Are they the ones to purchase your interest upon that event or does your interest transfer to your estate? Will they buy your interest in the company before your family does? If there is something called a buy-sell agreement, is it funded? There is a game plan for what happens to your company when you die, the default instruction manual will always be the business organizations code of your state governing what happens next, but wouldn’t it be better if you controlled the continuity of your company or at least controlled how it will wind down when you are gone? You can do that.

In the United States, we live in an asset distribution system. Every single asset you own will transfer according to the laws of the state you live in as there is no federal probate law. Your real estate can be transferred via deeds such as a transfer on death deed or a document known as a lady bird deed also known as an enhanced life estate deed. These deeds can transfer real estate, that includes mineral interests and timeshares, upon the death of the owner and avoid the probate process.

Right of Survivorship (JTWROS) account so that the transfer provisions are a part of the account creation. As a cautionary tale, do not make assumptions regarding the transfer provisions of these joint accounts. A joint account is not a JTWROS account unless specifically identified as a survivorship account. In that case, each joint owner has their own share and beneficiaries must be named in the documentation of the account. Without such named beneficiaries, the account assets will be subject to distribution in the probate court.

Any financial account may transfer via the contract governing the account. It may be a pay-on-death account and in need of listed beneficiaries in the documentation. It could also be a Joint Tenancy with

Your company interest will also transfer according to its operating agreement and state laws where no agreement is in place.

You see a pattern here, right?

Documents can control the distribution of real estate, accounts, and any financial interest you own on the date of your death, and that includes any business interest you own. Documents control our financial lives and yes, that includes your company. The operating agreement and/or articles/ and/ or by-laws act as the instruction manual for your company. Similar to the game of Monopoly, the rules can be complex, but when there are problems in the company, the rule book provides the structure needed to traverse challenging times.

Common challenging times for a business owner are divorce, bankruptcy and death. Will your business partner’s divorce effect your company? Probably. Will their bankruptcy effect your company? Probably. Death? Definitely. But you can control the extent of which the business is affected by these events by creating agreements that steer and control your company in the direction that you want should these challenges arise. Without such agreements, the operation of your company is subject to the laws of the state.

A good example may be what happens to your company in the event of a divorce. Does your spouse have an interest in your company? In a community property state such as Texas, your spouse will most likely have an interest in the company since income into the marital estate is community property. This is where business owners need to consider multiple legal documents to protect a business interest such as a premarital and/or post marital agreement in addition to the company operating agreement reflecting options upon divorce.

Generally, electing federal or state exemption law controls protected assets and assets exempt from creditors in the event of a bankruptcy. The structure of the company is the determining factor as to whether any assets of the business owner are subject to bankruptcy proceedings.

Creating a company and forging a new path is an exciting and scary event for an entrepreneur. Reviewing asset protection strategies with an attorney protects your future. The structure of your company and its foundation are dependent upon strong supporting documents. Put them in place so that you stay in charge of protecting your legacy.

Karen Telschow Johnson is an asset protection attorney, who focuses on estate planning and elder law. Licensed in Texas for almost 20 years, Karen is a graduate from Texas A & M University and Texas A & M University School of Law. As a Principal at Telschow Johnson Law, PLLC, Ms. Johnson is a member of the State Bar College of Texas, the National Association of Elder Law Attorneys, Texas Association of Elder Law Attorneys and the Tarrant County Probate Bar. Active in the community, Ms. Johnson is the Board Vice Chair for North Central Texas Chapter of the Alzheimer’s Association, Care & Prepare, Treasurer, and on the Board of Directors for 60 and Better. She is a proud mom to her two children and has become an expert in vacuuming up after her rescue dog Jenger, a lab/shepherd mix.