An important part of operating your small business is protecting your personal assets from business liabilities and your business assets from personal liabilities. Most small business owners use either a limited liability company (LLC) or corporation to limit their personal liability for business losses. An LLC may also protect your business assets from personal liabilities.
However, if your LLC or corporation is not documented and operated with the necessary degree of formality, it will not limit your personal liability for business debts or protect your business from any personal liabilities.
A small business is heavily reliant on its owner's involvement. If the owner becomes incapacitated without a plan in place, the business could fail. If the owner has failed to name a surrogate decision maker, they may be subject to a guardianship. The appointed guardian may lack the time or ability to operate the business and sell or liquidate it.
Corporate stock and LLC membership interests are both probate assets. If proper planning is not conducted, the business will be subject to probate at the owner's death. The delays associated with the probate process can cause a great disruption to the business. The judge may even order the business liquidated. After the owner's death, until a personal representative is appointed by the court, nobody will be authorized to make decisions for the business or access its bank account. Another risk is that the estate's personal representative may lack the ability and time to properly operate the business. Either of these risks could cause the business to fail, be liquidated or sold.
The shares in a corporation and membership interests in an LLC are both considered personal property that can be funded into a trust. Unlike some other types of personal property, however, an assignment is not sufficient. To avoid the delays associated with probate, the shares or membership interests will need to be formally funded into the trust.