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Have you made plans to protect your business in the event of your death or incapacity? Depending upon the type of small business you own, a sole proprietorship, a partnership or a corporation, the impact of your death or incapacity upon your business will vary.
Plan for the Unexpected
It is important to make a business plan for unexpected disasters such as if you or one of your company’s key decision makers become disabled or dies prematurely. Your governing documents should address who would make decisions in the event that you or a key decision maker is unable to do so.
Without proper planning, the incapacity or 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.
In a sole proprietorship, an individual conducts business and holds title to property in his or her name and is directly liable for the obligations of the business. The existence of the sole proprietorship depends upon the personal efforts of the sole proprietor. Therefore, the business generally ends upon the death or incapacity of the sole proprietor and the business assets and liabilities become part of the sole proprietor’s estate. All of the proprietor’s assets may be used to meet his or her debts, both business and personal.
A trustee or personal representative may seek legal authority to continue the business on behalf of the proprietor’s estate and, if the sole proprietor’s will so provides, the assets and liabilities of the business may be passed on by will to a designated person.
A partnership is an association of two or more persons to carry on as co-owners of a business for profit. The death or incapacity of a partner will have a different impact and will require different treatment depending on the form of the partnership and the nature of each partner’s involvement.
In a general partnership, the death of a general partner legally dissolves the partnership. All business activity, except as necessary for winding up the partnership affairs, stops. However, a limited partnership or registered limited liability partnership is not automatically dissolved upon the death of a limited partner.
A written agreement, which specifies what will happen upon the death or incapacity of a partner in a limited partnership or limited liability partnership or the sale or purchase of a deceased partner’s interest, controls. Such an agreement may establish a mutually agreeable purchase price for each partner’s interest and may contain a provision for adjustment of the purchase price. The partnership may also have provided for life insurance to fund the purchase of the deceased’s interest.
A corporation is formed by filing formal documents with the relevant state agency. The death of one of the shareholders does not affect the corporation unless there is an agreement to the contrary. This is because a corporation is an entity separate from the owners.
When a shareholder dies, his or her shares are distributed to the shareholder’s heirs as personal property according to state law, or as directed by the shareholder’s will. However, it is not uncommon for an agreement to require that a corporation buy out a shareholder, at least upon retirement or death. Accordingly, the certificate of incorporation, bylaws and any relevant shareholders’ agreements or other corporate organizational documents should be reviewed to determine whether such an agreement exists. Also, the certificate of incorporation may require the dissolution of the corporation upon the occurrence of a specific event. It should be reviewed to determine whether the death of any or all of the shareholders requires dissolution.
There are several important tools available to help small business owners plan for the unexpected; which tools you choose depend upon the ownership structure of your business and your intentions. Your options can include:
- Granting a key manager a limited power of attorney so that he or she will have the authority to make decisions and continue business operations in the event of your incapacity.
- Establishing an advisory committee to act in the event of the key decision maker’s incapacity if your business has several executive level employees. The committee could be given the authority to make key decisions by consensus.
- Executing a document that would trigger the transfer of your business interests to a trust in the event of your incapacity. The trust company would continue business operations on your behalf in the event of your death or incapacity.
- Implementing a buy-sell agreement if there are co-owners, key managers or other employees that might be interested in purchasing the company. 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.
- Establishing an employee stock ownership plan to insure that a buyer is available at an owner’s death.