What Happens to Your Business if You Die? The Importance of Succession Planning

Starting and maintaining a business is no easy task. If it’s a family business, you may have siblings or children depending on you for their livelihood. What happens if you’re not there to keep it going?

Planning for the succession of your company if something happens to you is an uncomfortable topic, but one that requires both consideration and action. This article will explain how to prepare for an emergency situation in your business.

What Happens to a Business if the Owner Dies?

If the owner of a sole proprietorship or single-member LLC dies suddenly, the business is treated as part of their estate. It goes through probate with the rest of the owner’s personal and business assets. If they don’t have a detailed will, it can be liquidated to pay off business debts or divided among heirs and beneficiaries. Let’s take a closer look at what certain business structures can expect.

Sole Proprietorships

In the case of sole proprietorships, the business and the owner are a single legal entity. The business ends when the owner dies, leaving the probate court to decide the fate of the business. During probate, the business assets are frozen until the judge makes a final determination. The business may be liquidated or divided according to the will. If no will exists, its fate is determined according to state law on intestate succession.

Partnerships and Limited Liability Partnerships

Partnerships and LLPs should contain a similar arrangement for what happens if one of the partners dies. Without a formal agreement, the death of one partner dissolves the partnership, terminating operation except for any winding-down needed to close out the business.

Limited Liability Companies

Limited liability companies (LLCs) should have an operating agreement detailing what happens if the owner dies, even if it’s owned by one person. The agreement should explain how any surviving owners can buy out the heirs, if the heirs will be allowed to continue as owners, and if the business entity will continue after the owner’s death.

Corporations

A corporation survives the owner’s death. The deceased’s ownership shares are part of their estate. The important question is who will take over the day-to-day operations. Without a succession plan, disputes among co-owners and surviving family members can cause a corporation to collapse.

The Emergency Succession Plan

Business succession planning should be part of any startup’s plan. However, businesses also need an emergency succession plan for immediate situations. What if the principal is temporarily incapacitated or unable to carry out their duties for a time? What do you need for the time between the emergency and when you have that succession plan put together?

Your first step should be a consultation with a business attorney or estate planning attorney. Small businesses and partnerships should be considered part of your personal estate or retirement plan. If you’re considering retiring on your business profits, there are tax implications to your eventual sale or departure from the company. Discuss this with an attorney, keeping your partners and personal representatives in the loop.

Steps for Your Emergency Succession Plan

If you’re a sole proprietor or single-member LLC, you need a designated agent in a power of attorney on standby. This person can carry out your instructions if you’re incapacitated. If your business is a multi-member LLC or partnership, let your partners know about the succession plan. You may need to amend your partnership agreement to include your new arrangements.

Create an “Emergency Binder,” a physical or digital (ideally, both) document that has all the essential passwords, bank account information, contact information, and instructions your replacement may need to keep the business running. Keep your Emergency Binder(s) updated and in an accessible but secure location. If some of your accounts have two-step authentication, be sure that those instructions are included in your binder.

Ensure that your partners or survivors have financial means to pay for any buyouts or other arrangements. Some types of succession plans, such as buy-sell agreements, require partners to purchase life insurance policies on one another.

Review your emergency plan with your attorney and tax advisor. There may be estate tax implications when passing your business to your heirs or to business partners. Your attorney can advise you about what needs to be done to avoid excess tax payments.

An agent only has authority while you’re living. Once you pass, the agent’s authority in a power of attorney ends. The personal representative or executor takes over representing your estate.

Get Legal Assistance From a Business Law Attorney

You shouldn’t try to assemble either an emergency plan or a business succession plan alone. A business law attorney is essential to ensure your business interests are protected when you create this plan. If your plan is going to cover your eventual retirement or you need to include it in your will, an estate planning attorney’s advice is a must. Federal and state laws will also affect how your plan is written.

You worked too hard to make your business successful. Don’t leave the ending to chance.