Business owners led hectic lives. Understandably, some things on business owner’s “To Do” lists end up getting delayed. Estate planning, however, should not be something that ends up postponed. Not only is estate planning critical for business owners, but some unique issues arise. This article reviews just some of the unique and nuanced issues that business owners often must navigate while estate planning.
# 1 – Unintentional PPP Borrower Change of Ownership
To respond to the adverse economic impact of the COVID-19 pandemic, the CARES Act was signed into law in March 2020. As part of the implementation, the Small Business Administration as well as the Department of Treasury implemented the PPP Program so lenders could loan money to both small and medium-sized businesses to maintain their payroll as well as hire workers who were laid off and cover applicable overhead. These loans are forgiven provided the proceeds are used in accordance with applicable laws.
One unresolved issue is whether there is a change of ownership for a PPP Borrower under the SBA Guidance, which if not consented to by the Lender or Small Business Administration could forego the forgiveness aspect of a PPP loan. Small Business Administration Guidance defines change of ownership as occurring when at least 20 percent of the common stock or other ownership interest of a borrower is sold or otherwise transferred including to an affiliate or an existing owner of the entity.
This definition includes gifts made from parents to trusts for the benefit of children or other beneficiaries.
Even if transfers of this nature are permitted under the applicable documents, however, such transfers will likely not be permitted under Small Business Administration guidance provided the transfer involves at least 20 percent interest of the PPP borrower. If such interest threshold is either met or exceeded and the PPP loan has not been fully forgiven, it is critical that both the applicable PPP loan document as well as Small Business Administration guidance are satisfied.
# 2 – Unintended Dissolution of an Estate
One of the most common questions, when a deceased person’s estate is administered, is whether the deceased individual owned any interest in any business entities. If the deceased individual was the sole owner of a New York state LLC, a person must then review the LLC’s operating agreement. Under Section 701(a)(4) of the LLCL, a New York state limited liability company is dissolved and its affairs are concluded any time there are no members unless the legal representative of the last remaining member agrees formally to continue the LLC and to the admission of the legal representative to the NY LLC as a member within 180 days after the occurrence of the event that terminated the continued membership of the last remaining member.
New York law permits the operating agreement of the NY LLC to provide increased flexibility than the statutory default by permitting the operating agreement to both modify the 180-day time period and to alter the statutory dissolution provision.
As a result, it is critical to inquire about assets ownership as well as to review the operating agreement as soon as possible to determine where there are time-sensitive matters. While the dissolution of an entity that is a sole member of a NY LLC could also trigger this provision, the potential dissolution under NY LLC 701(a)(4) occurs on the death of an individual who was the sole member of a New York LLC.
Obtain the Assistance of an Estate Planning Lawyer
Estate planning is critical in taking control of situations where a loved one unexpectedly passes away or becomes incapacitated, but many people still fail to create adequate estate planning. If you or your loved ones need the assistance of an estate planning attorney, contact Ettinger Law Firm today to schedule a free case evaluation.