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The Perils of Advisor Sole Proprietorships and Single-Member LLCs

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Advisor continuity and succession planning has been written about and talked about ad nauseam, but I would say justifiably so. It is a critical industry-wide issue that warrants industry-wide action. Yet each and every advisor’s individual situation is unique and requires individualized attention to the nitty-gritty details. One such detail is the advisor’s corporate form (or lack thereof), and an understanding of how it has the potential to completely muck up even the best-laid plans.

To be clear, this article is focused on continuity planning as opposed to succession planning; i.e., planning for an advisor’s unexpected disability, incapacitation, or death as opposed to a designed exit strategy while the advisor is still alive. The tragic but all-too-common scenario is an advisor that has spent a lifetime building his or her business and then passes away without the legal mechanisms in place to continue the business’ legal existence and transfer its value to heirs without going through probate. 

Let’s take a sole proprietor advisor. A sole proprietorship essentially means that there is no legal distinction between the advisor and the advisory business – they are one in the same. Thus, if the advisor dies, so too does the advisory business. What this means from a practical perspective, according to the recently published NASAA Model Rule on Business Continuity and Succession Planning, is that “the sole proprietorship itself may legally terminate as an entity, as would any powers of attorney, advisory contracts, and other client agreements.”

The authority of family members, heirs, or business partners to act on behalf of the client and perform advisory services is thus not automatically transferred and clients may become unmanaged retail accounts at the custodian until a new advisory contract is signed. Furthermore, upon the termination of a sole proprietorship, it usually must be formally wound down through the satisfaction of outstanding debts, collection of accounts receivable, sale of assets, etc.

If the deceased advisor had incorporated the advisory business into an LLC, a corporate form separate and distinct from the advisor has been created. While this is certainly a step in the right direction from a continuity planning perspective, it may not solve any of the sole proprietor problems if the advisor was the single LLC member or the LLC’s operating agreement was not properly drafted.

For example, if the advisor dies and was the sole member of the LLC, query who would or could be responsible for managing the advisory business’ affairs… assumedly pursuant to the direction of deceased advisor’s personal representative, conservator, or trustee relying on other estate planning documents.

Moreover, an LLC operating agreement that does not contemplate its member’s death may also paralyze the continuity process. To avoid the scenario of trying to figure out what to do with an LLC with no living members, one solution is to appoint a successor manager of the LLC in its operating agreement. Another may be to register the LLC interest “transfer on death” to a successor. The alternative may very well be a forced wind down of the LLC if no new member can be admitted or no successor is named. 

Corporate organization documents like an LLC operating agreement should be carefully drafted to work hand-in-hand with an advisor’s other estate planning documents such as a will or a trust.

As one might expect, an LLC operating agreement in conflict with a will or a trust will only further delay the transition of the advisory business. During a continuity event, time is not on anyone’s side. I would go so far as to say that the passage of time and the advisory business’ enterprise value are inversely related after a continuity event occurs. Preservation and transition of value, after all, is the goal. 

Other continuity planning variables with respect to corporate structure will largely depend on state laws, as well as SEC and state security regulator rules on licensure, contract assignment, privacy protection, solicitation, and disclosure (among other considerations).

Suffice to say there are a lot of moving parts to take into account when designing a comprehensive continuity plan. Corporate formalities are only one element, but a vitally important element nonetheless.  


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