What Happens When a Business Partner Dies?
When dealing with a business partner(s), your company must prepare for all eventualities. The death of a partner is never a fun thing to plan for, but it must be done. If you wish to keep your business running successfully after your partner passes away, you want to have a proper succession plan set up. On the flip side, maybe you have different plans for your business when they pass away. No matter what your plans are, this article will help steer you in the right direction.
Having a distinctly outlined plan for an event such as death, retirement, or a change in leadership, is always something to prioritize. As a business owner, you would rather be on the safe side than risk a disastrous business downfall. Nobody wants to plan for the death of a partner, however, you will benefit from it in the long run. Planning for these events can be timely and tedious, but is worth it if you are investing your time and money into your business.
This article will outline how you can prepare for the death of a business partner, by understanding differences in corporation types, succession planning, and what to do if your partner passed away without a plan in place.
Sole Proprietorships, General Partnerships, Corporations & Limited Liability Companies
Different business types will require different succession/ unforeseen event planning. If the business is a sole proprietorship, the business will become part of their assets belonging to his/her estate. From there, the assets will be distributed in accordance with their will. For corporations, the corporation does not end with the death of the owner. After the death of an owner, their shares in the company would become part of their estate, and then handed to the beneficiaries. Corporations continue as normal even during an event such as death. This is due to the fact it can still function accordingly, even as shareholders change. Limited Liability Companies (LLCs) function under operating agreements. This agreement will state what will happen to the company in an event of death. An LLC can also continue as normal during an event of death. There will be provisions in your operating agreements about the late partner’s interest. For example, it may go to a new partner, or someone in their will. As for general partnerships, it is important to create a distinct plan, to avoid disruptions to the business in the case of a partner’s death.
Succession Planning Options for a General Partnership
Before diving headfirst into your business, it is important to do your research on all the possible general agreement options. Knowing your options before signing any paper documents is very important. The list of options below are measures to discuss with your partner now to help your business in the event of death in the future.
One of your options includes planning out how you can liquidate the business and distribute funds to both partner’s families in the event of a death. If you know that once your partner passes away, you no longer want to run the business without him/her, this option may be the most financially responsible. You may know that the profits of your business are doomed without your late partner and finding a new business partner can be risky. Dissolving a business can be sad, but keep in mind your end goals.
Additionally, outlining how you can buy your partner’s share of the business is an option. This option may be the most realistic for you if you wish to carry on with the business. Just know that this will cost you a chunk of your money, and could possibly expose you to additional risks and liabilities. However, if you are passionate about the business and see a profitable future, this choice may be best for you.
Furthermore, you may want to plan the sale of your business to your partner’s heirs such as the surviving spouse. This may not be what you want, but it is always an option. Small business owners should always keep income taxes in mind. You may want to evaluate if it will be financially beneficial having a large chunk of your business income deducted in taxes. In the event of a partner passing away, who primarily ran the business, it may be in your best interest to sell your partner’s share of the partnership to their family. It may be impossible to run the business without your late partner around anymore.
Lastly, you may also choose to continue the business with your late partner’s family members, if you want to follow the wishes of your late partner. Remember that your partner’s heirs are not your original partner and will incur additional risk. It may take a long time for your new business partners to become familiar, skilled, and trained within your company. Just remember while keeping the business alive may sound great, taking on a set on new partners is no small task.
Having a Business Partnership Agreement (Buy-sell Agreements)
A specific form of succession planning includes having a buy-sell agreement. There are three main types of buy-sell agreements. The agreement will outline things such as what situations can permit a buyout, who can buy shares of the business, the deceased partner’s estates, and ultimately will stipulate how a business partner’s shares may be reallocated in an event of death. Having a buy-sell agreement will ultimately outline the conditions of your business’s exit plan. For example, a buy-sell agreement may give explicit details as to how their partner’s shares will be brought back into the business. Instead of selling his/her shares to someone outside of the business, the agreement may state that it is to be reinvested into the company.
The first type is a cross-purchase agreement, which allows the remaining owner(s) to buy the deceased partner’s shares of the company. The second most common is a redemption agreement. This agreement requires that the business buys the shares of the partner. In other words, the deceased partner would sell their shares back into the company for typically stocks or cash. The third option you can use is a hybrid buy-sell agreement. This means that both the business owners and the company could have purchasing options. In the agreement, you would be able to dictate whether the surviving business partners get the first choice, or the company would be able to purchase the remaining interest. This plan is less commonly used and is sometimes called a “wait and see” plan.
If finances may become an issue later down the line, consider buying a life insurance policy earlier on in the business. When thinking about which plan may be appropriate for the business, you should think about the number of partners involved. For example, in a redemption agreement, the business may buy the insurance policies for its owners. In the case of a cross-purchase agreement, the owners purchase the other partner’s life insurance and will become the beneficiary for the other partners/shareholders. Depending on how many business partners you have, you may favor one agreement more than the other. For example, if you have a lot of partners, you may favor the cross-purchase agreement.
These types of agreements are made to help you and your business partners operate effectively, and avoid potential conflict. Having a legally documented written partnership agreement will help you, as well as your business partner(s) in the future. All of your business assets will probably have to go through probate. Therefore, having a partnership agreement will allow you to put your assets where you want without worry.
What to Do If Your Partner Died Intestate
If you and your business partner never took the time to formally plan for death, you may run into potential issues with your finances. Having a formal business partnership agreement is not legally mandated, which can lead to a sticky situation later on. In the case of having no formal exit plan, it will be up to your state’s Partnership Act to decide what will happen to your partner’s share. Your state laws will dictate what will happen. There are intestacy laws created to deal with situations like these. Ultimately, you may end up owing the debt of your late partner’s half of the business. Your deceased partner’s share could be lost, leading to the downfall of your company. You may want to seek legal advice to find a solution that meets your desires.
How to Maximize the Life of Your Business
The death of a partner can be a difficult time as a business partner, friend, or family member. To avoid getting yourself into a knot of legal trouble, considering your options for a partnership agreement is a smart move. This is especially important if you want to keep your business running efficiently after the death of your partner.
Whether you decide you want to dissolve the business, sell your shares, or buy out your partner’s stake is ultimately up to you in the end. Think long term goals, not short term. What might be fast and easy in the short term may hurt you, your family, and finances in the end. Planning for the worst is the best thing you can do now, to benefit you in the future.
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