I have a question about family businesses. Say for example someone started a sole proprietorship, and down the road the business grows and is successful, and that person wants to pass the business on to his 2 sons as he gets older. How does this work? Is there any way to change the sole proprietorship to a partnership between the 2 sons, or would they have to start a new business?
@srg36 to answer your question a sole proprietorship is owned by one person only and doesn't survive them after death. Because of this if a father has sole proprietorship over a business he would have to create a new business with his sons as to share the proprietorship.
I have a question about family businesses. Say for example someone started a sole proprietorship, and down the road the business grows and is successful, and that person wants to pass the business on to his 2 sons as he gets older. How does this work? Is there any way to change the sole proprietorship to a partnership between the 2 sons, or would they have to start a new business?
This is a great question @srg36, from the research I gathered online it seems that a sole proprietorship can be changed to a partnership to encompass other business partners like sons. However, to make the partnership fully legal and valid the sole owners paperwork must be changed to a partnership. On this topic I also have a question. Once the sole proprietorship is changed to partnership if the sons want to pass the business to their children is more paperwork needed for each generation? Or is there a way to make one contract for all future generations?
I do not have personal experience with owning a family business and how to delegate and pass down the duties and responsibilities of a business, but I would like to weigh in with assumptions. I would assume that the parents have put a great deal of hours, blood, sweat, and tears into making the business successful. Provided that the children wanted to be involved and take over the business I think that the parents should divide the ownership and duties by what they as parents feel is equal and an obtainable goal for their children. They should not feel obligated to put any of their children into a seat of authority in regard to their hard work if it may deteriorate due to incompetence. That’s just my two cents. The owner could change proprietorship by going to an informed lawyer who is very well versed in business law.
I have a question about family businesses. Say for example someone started a sole proprietorship, and down the road the business grows and is successful, and that person wants to pass the business on to his 2 sons as he gets older. How does this work? Is there any way to change the sole proprietorship to a partnership between the 2 sons, or would they have to start a new business?
There is always a way to do a thing... you just have to be willing to look for the solution. For this one, I think you'd have to convert the company to an LLP or another type so that the company won't die with Dad. In reality, I think this is the exact reason people prefer LLC or LLP starting out so that there is less work if wanting to pass the reigns to another person. He could do the paper work to make both sons partners and then when they are all ready to take over, split his portion of ownership between the sons by way of "selling" it to them.
I have a question about family businesses. Say for example someone started a sole proprietorship, and down the road the business grows and is successful, and that person wants to pass the business on to his 2 sons as he gets older. How does this work? Is there any way to change the sole proprietorship to a partnership between the 2 sons, or would they have to start a new business?
There are several ways to go about selling your business down to your children. One way is to sell the business assets to the new owner which is a good option for those who need income from the business such as retirees. The new owner would then form a new business using these assets. The current owner could use a buy-sell agreement which is good for business owners who have selected the person they want to transfer the business to but isn't necessarily ready to take over. In a buy-sell agreement, a business owner can specify that, after a triggering event, the designated successor will be required to purchase the interest in the business. Common triggering events include retirement, incapacity, and death. Lastly, a business can be transferred over through a living trust. The business owner, while living, would serve as both trustee and beneficiary of the trust. This allows the owner to run the business as normal for as long as the owner chooses.
Family business is often conducted with a handshake, but verbal agreements can cause problems. An owner should have a shareholder agreement in place outlining who gets to vote, board member responsibilities and how shares should be valued in the event of an exit. Another way is possibly giving a gift. If you charge a lower rate or hand over shares of the company for nothing, it’s considered a gift. While some may advised against this route, business owners who are financially secure may want to hand over the company to their children for nothing in return.
I have a question about family businesses. Say for example someone started a sole proprietorship, and down the road the business grows and is successful, and that person wants to pass the business on to his 2 sons as he gets older. How does this work? Is there any way to change the sole proprietorship to a partnership between the 2 sons, or would they have to start a new business?
The person that starting the sole proprietorship and later will pass it to the two sons when they are older the way this will work is that the whole structure will have to change for the business. The business will no longer be a sole proprietorship as it will no longer be owned by one person but it will now be owned by two. So the licensing for the business one will have to reapply to possibly a LLC. Then make sure that this registered with the IRS, make sure to have a point of contact, and make sure to file with the articles of organization. Essentially this is a aspect of the business being owned by more then one person and its starting anew when becoming the LLC.
I have a question about family businesses. Say for example someone started a sole proprietorship, and down the road the business grows and is successful, and that person wants to pass the business on to his 2 sons as he gets older. How does this work? Is there any way to change the sole proprietorship to a partnership between the 2 sons, or would they have to start a new business?
The father would not be able to pass the business down to his sons. The reason why is because sole proprietorship means that the company will die with the owner. The only way the business would be able to be passed down would be by converting it to a LLP and selling the shares of his business to his sons.
Sole proprietorship is a type of business owned and run by ONE person. There is no distinction between the owner and the company. The owner is entitled to all the profit the company makes and is responsible for everything. Legally, it is advised for the owner to change the sole proprietorship to an LLP, but it’s not possible to directly convert the sole proprietorship to a LLP. However, it is possible to do so, but it requires a lot of document submission and time. One way to do it is that the owner basically has to close the sole proprietorship and register it as a LLP. The steps to file for a partnership depends on one state to the other because they all have different laws.
I will answer this question from personal experience as my father is a sole proprietor and transferred it to my mother.
As we have learned, there can only be one owner. If a parent wanted to pass on the business, the name of the owner would have to be changed to one of the children, not both. There is no formal paperwork for this. Instead, the owner stops reporting it on their income tax and the new owner would begin reporting it on theirs. Of course, all bank accounts would need to be changed, but overall, it is a simple process.
Many have stated that a sole proprietorship is not transferable, unfortunately, this is inaccurate information. If the father dies and includes the name of the new owner in a will, it can be passed on even after death.
In the case of a sole proprietorship, the owner is fully responsible for how the business works and what is allowed and what is not. The owner is free to make any changes he sees fit to help his business grow. But of course there is an imminent future to think about. Unfortunately, with the death of the business owner, the business also dies. However, the owner has the option of handing over his equipment to his children, or whoever he deems appropriate for the task. This does not mean that the company will be the same as it was when it was created. The two boys can take the team they left and continue the business as the owner, but it basically becomes a different business. Children can be associated to start this company, but that does not mean that it is the same. In a sole proprietorship, the original owner remains the business owner and future generations would have to start a new business.
I will answer this based on my situation since my father owns a business that will in fact be passed down to me and my brother. As we learned from the lecture a sole proprietorship is reliant on just the one owner and once he/she is gone so is the business. So before my father started up this current business he had an even smaller business. With hopes of expanding he started an LLC as opposed to a sole proprietorship knowing that one day my brother and I would join him and we'd expand as a family. In doing so he obtained an EIN and since we keep it in the family we try to avoid the disadvantages mentioned in class such as managers sharing profit and admin duties for upkeep. The hardest part was to set it all up. In my opinion, an LLC makes a lot more sense than a sole proprietorship for the security of personal funds and to ensure your life's work can go on even if you can't.
Yes it is possible to change owner ship to the sons. It simply requires the proper documents to transfer ownership: The business would have to undergo a change to be an LLP (limited liability partnership) However the business will now become an equal partnership between the brothers.
In my opinion, this would depend on the father’s perspective on his business. If the goal is to continue the legacy of the business, then it makes sense to change the sole proprietorship to a partnership between the sons. This would not only maintain the business but would also carry on the family name and reputation. This shift doesn’t require serious legal or written partnership agreements. The sons being on the will would suffice. Starting a whole new business would mean going through years of hard work. Thus, giving the sons a share of the company or formally making them partners of the company would be enough to create a partnership.
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