Sedona Arizona

What Happens to Your Business When You Die?

Let’s deal with an uncomfortable question: What happens to your business when you die?

The thought of death is unsettling – it’s the great unknown of this life. Because no one really wants to deal with their own mortality, too many people die subject to their state’s intestate laws. This leaves a difficult and messy process for your loved ones and business associates.  

For business owners, the question of what happens to their business after their passing is not only a matter of personal concern but also of professional responsibility. As an owner, you have a fiduciary duty to your shareholders, partners, and in certain contexts, employees or customers. This duty includes having a plan in place for the inevitable.

How is your business incorporated?

The fate of your business when you die depends largely on its structure, planning measures you’ve put in place, and legal considerations. Let’s explore what could happen and how to prepare for the continuity or dissolution of your business.

Sole Proprietorships

If you’re a sole proprietor, your business doesn’t exist as a separate legal entity from you. Therefore, upon your death, the business does not automatically continue. Instead, it becomes part of your estate. The executor of your estate, designated in your Will, is responsible for settling any debts and distributing the remaining assets according to your wishes. If you want the business to continue, you should have a succession plan that includes instructions for who will take over the business.

Partnerships

The impact of a partner’s death on the business depends on the partnership agreement. Some agreements include a buy-sell clause that allows the surviving partners to buy the deceased partner’s interest. Without an agreement in place, the partnership may automatically dissolve. In some cases, the deceased partner’s interest may pass to their heirs, potentially complicating future business management.

Corporations and LLCs

Corporations and Limited Liability Companies (LLCs) have an existence that is separate from their owners. This means they can continue operating even after an owner’s death. Their business operating agreement, along with their Will or Trust, can transfer ownership interest. The impact on the business’s operation largely depends on the deceased’s role in the company and how critical they were to its operation.

Planning for Business Continuity

  1. Create a Succession Plan: A clear succession plan outlines who will take over your responsibilities in the business. You should write this plan, or operating agreement, with the help of a business attorney, communicate it to key stakeholders, and review it regularly.
  2. Buy-Sell Agreement: This agreement is crucial for multi-owner businesses. It details what happens to an owner’s interest in the business in various scenarios, including death. A successful buy-sell agreement details the funding method, often using insurance contracts to buy out the deceased owner’s ownership share or pay off debts.
  3. Business valuation:Knowing your true business value is essential to properly fund your buy-sell agreements or other cash reserve sources. Don’t just guess at your business value or apply a simple revenue multiple. Get a professional valuation completed! The value of your business will change over time; build flexibility into your projections and succession plan funding.
  4. Estate Planning: Ensure your Will or Trust is up to date and includes specific instructions regarding the distribution of your business interests. Consult with an estate planning attorney to ensure your legal bases are covered.
  5. Documentation: Keep your business documents, access credentials, and operational procedures well documented and accessible to those who will take over.

Death is a difficult topic, but avoiding it can lead to greater complications for your business and loved ones. Proactive planning allows you to ensure your business legacy continues or resolves in a way that aligns with your wishes, providing you peace of mind and security for those who depend on your business.

Need to create a succession and exit plan for your business? We can help. Get started by clicking here.

Disclosures

Life Moves Wealth Management is a registered investment advisor offering advisory services in the States of Arizona and Indiana, and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. Information contained on this site should not be considered a solicitation to buy, an offer to sell, or a recommendation of any security in any jurisdiction where such offer, solicitation, or recommendation would be unlawful or unauthorized.

The information on this site is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This information should not be relied upon as the sole factor in an investment making decision. Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any recommendations made will be profitable or equal any performance noted on this site.  

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Author: Dale Shafer II, CFP®, APMA®, CDFA®

The National Association of Personal Financial Advisors
The Society of Advice

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