Documents Are Important In Business Succession Planning

These are real facts from a real case (except that the names have been changed):

Imagine that Bill owned a motorcycle shop for years as a sole proprietorship (namely "Bill's Used Motorcycle Parts"). Bill wanted to reward Ron, a loyal employee, because Bill was thinking that his health was failing and he wanted to retire. Bill and Ron sign a "Bill of Sale" transferring 49% of "Bill's Used Motorcycle Parts, Inc." to Ron. Then two weeks later, Bill and Ron file Articles of Incorporation for "Bill's Used Motorcycle Parts, Inc." Bill retires, and Ron takes over running the business. Six months later, Bill dies. The sole proprietorship is valued at approximately $1.5 million (which is mostly parts and inventory).

Issue: What is the value of what Ron owns?

Answer: Bill and Ron formed a corporation. However, Bill never transferred his interest in the sole proprietorship to the corporation. So ... Ron owns 49% of the corporation, and the corporation only owns whatever assets and goodwill were acquired since the date of incorporation.

Moral to the story: The whole problem could have been solved by a simple Sale and Assignment form transferring all of the inventory and assets of the sole proprietorship to the corporation.

The result in this case was that the estate "won" and Ron got a lot less than he thought he was going to receive.