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More About Business Succession Planning

What is Joint Tenancy with Right-of-Survivorship?

JTWROS is a form of joint ownership with a survivorship feature.  Two or more people own as asset together and the survivor of them owns the property outright.  For example, Joe and Sam own a house as joint tenants with a right-of-survivorship.  Joe dies in a skiing accident.  Now, Sam owns the house automatically by operation of law.  There’s some “lawyer math” included in JTWROS.  Each owner owns 100% of the property, no matter how many joint tenants there are, 2 or 20.

What does “Tenants-in-Common mean”?

Tenants-in-Common is a form of joint ownership in which the owners can own equal or unequal portions of the property.  For example, Sally, Jane, and Sue own a beach house together as tenants in common.  Sally is a 20% owner, Jane is a 30% owner, and Sue is a 50% owner in the beach house.  There is no survivorship feature so when Sally dies in a boating accident, her 20% ownership in the beach house will pass to whomever she names in her will or trust, not necessarily Jane and Sue.

What is an LLC?

A limited liability company (LLC) is an entity commonly used to own and operate a business with relatively easy set-up, operation, and taxation.  The LLC has two levels of asset protection: protection of LLC assets from outside creditors and protection of outside assets from LLC liabilities.

An LLC is often preferable to a partnership for creditor protection shielding business owner’s personal assets from the creditor’s of the business.  Statutorily, general partnerships give no protection to a partner’s personal assets if the partnership gets sued for any reason.  Limited partnership statutes require both general partners and limited partners, but only give protection to limited partners.  The general partner has no protection from a partnership’s creditor attaching his or her personal assets.

“Inside liability” is a liability that happened within the business or because of the business or part of the business itself.  Inside liability results from something specifically having to do with the business such as a broken contract or employee issues.

An “outside liability” is the personal liability of one of the members of the LLC.  The creditor protection is intended to protect the business from creditors of the debtor-member.  For example, a member may be at fault in a liable suit unrelated to the LLC business.  The creditor may be able to go after the shareholder’s stock but cannot go after the assets of the LLC business assets.  The LLC is able to function and contact business as usual despite the debtor-member’s outside liabilities.