An important distinction among the available forms of business includes the continuity of existence, which refers to the continued existence and operation of a business after an owner dies or leaves the business. A corporation ordinarily has no restrictions on the continuation of its existence, while a partnership is usually limited to a period measured by the lives of its members.

Sole Proprietorships

The sole proprietorship terminates by law upon the death of the sole proprietor. A personal representative may usually carry on the business for the limited period of time necessary to permit its winding up. Potential purchasers of a sole proprietorship might be unwilling to purchase the business for fear that key employees would not remain after the death of the owner to whom they had given their personal loyalties. The loss of the sole proprietor's personal services, often a major factor in the going concern value of the business, will often depress its sale value and its valuation for federal estate tax purposes.

General Partnerships

In the case of a general partnership, the usual rule is that the death or withdrawal of one of the members dissolves the partnership, although an appropriate agreement in the partnership articles, a separate agreement or the decedent partner's will may provide for the continuation of the partnership business despite dissolution. In effect, the original partnership is dissolved and a new partnership is created to carry on the enterprise. The new partnership may consist of the former partners plus a new partner who has purchased the partnership interest of the withdrawing or deceased former partner, or the remaining partners may themselves purchase the interest.

Limited Partnerships

The continuity of a limited partnership's existence is usually governed by the provisions of the limited partnership certificate and the terms of the limited partnership agreement. Most state laws provide that a limited partner may assign his interest in the firm to someone else without affecting the dissolution of the partnership. However, the withdrawal of a general partner does constitute express grounds for the dissolution of a limited partnership, unless one of the following is true:

  • At the time of the general partner's withdrawal there is at least one other general partner and the provisions of the partnership agreement permit the continuation of the business
  • Within 90 days of the general partner's withdrawal, the remaining partners agree in writing to continue the business and to elect a new general partner if necessary

Limited Liability Companies

With respect to limited liability companies (LLCs), upon any member's death, retirement, resignation, expulsion, bankruptcy, or dissolution, the LLC is usually dissolved unless the remaining members agree to continue the entity.

Corporations

The corporation is the most suitable form of business if continuity is desired. The articles of incorporation, which are the documents that created and govern the corporation, can provide for perpetual existence and, as a result, the corporation can continue without interruption upon the death or withdrawal of any of its shareholders, officers or directors.

Corporate existence may come to an end through compliance with the applicable state statute. The methods of terminating corporate existence have traditionally been characterized as voluntary dissolution, involuntary dissolution and forfeiture of the corporate charter. Nonetheless, despite the possibility of termination of its existence, the corporation usually has the power to continue in existence forever.

Buy-Sell Agreements

Without proper planning, the premature death of a business owner may result in the business being liquidated, sold to outside parties or surviving family members may have to become active in the business. You should consider having a buy-sell agreement to plan for the orderly disposition of your business.

A buy-sell agreement can be between shareholders of a corporation, partners of a partnership, or a key employee and a sole proprietor. The agreement obligates the surviving business owners, key employee or the business itself to purchase the interest of the deceased owner.