Q: I am a home-based independent contractor. I have my own limited liability company (LLC), which files its own tax returns. I have developed a very good client base, and I want to retire in the near future. For estate planning purposes, I need to decide what will happen to my client base and pending commissions if I die before I fully retire. Can I provide, in my will, that my client list gets transferred to another, active independent contractor (IC) or to my host agency and that they must pay my heirs? Can I provide that the commissions that come in after I die will go to my spouse? What if I have no will?
A: The laws of estate planning vary from state to state, so, above all, you need to consult an estate planning lawyer in your state to get definitive answers. However, here is some advice from a travel-law perspective.
Your LLC, which is a separate legal entity from yourself, owns the client base and the commissions receivable. All that you personally own is the LLC membership interest, which is analogous to the stock of a corporation. That ownership interest will pass to the heirs that you designate in your will, such as your spouse or your children.
You could instead theoretically designate an IC or your host as the heir to the LLC membership, but they would be under no obligation to pay anything to your estate or your heirs. Therefore, bequeathing your business to other businesses makes little sense to me.
From a travel-law perspective, it is important to realize that your LLC is a valuable enterprise. Indeed, there is no inherent reason why a home-based agency would be worth less than a brick-and-mortar agency.
To some buyers, a home-based agency might even be worth more than a brick-and-mortar business with similar sales volume, as the former generally has no long-term contracts, such as an office lease or GDS contract. If a buyer wants to absorb your business into its office, it would certainly prefer not to have to worry about such commitments.
So, instead of directing your executor to give away your LLC membership, the best course may be to direct your executor sell the LLC. The sale price would typically be a percentage of future commissions over a number of years.
For example, a buyer may be willing to pay your estate 20% of commissions received during the first two or three years after the sale of the LLC. These payments would then be collected by your executor for the benefit of your designated heirs.
If you die without a will, your LLC membership interest would pass to heirs like any other personal property. If you have both a spouse and children, state laws generally divide your property among all of them.
Unfortunately, there would be no way for you to direct your heirs to sell your business on the terms that I suggest above, so its value would probably be lost.