Business owners often fail to contemplate what would happen to their business if they were to die or become incapacitated. Is there a transition plan? Who will take over ownership or operations?
Just as an individual should create an estate plan to distribute the assets they have accumulated in their lifetime after death, business owners should take similar precautions now to financially protect their business, and their families, should disaster strike. Consider the following situations.
The Business Owner
George and Daniel each owned their own business. George was a sole proprietor, while Daniel was the sole shareholder of a small corporation. Each had a staff of five employees. George managed all aspects of the business including daily operations. Daniel was the president of his corporation, but he worked with the company’s vice president in managing the business.
Impact of Hospitalization
Both George and Daniel were hospitalized after a heart attack. George’s employees knew too little to run the business during George’s absence. Since he was too ill to direct his employees from his hospital bed, his business virtually stopped until he recovered. On the other hand, Daniel’s vice president was able to run the business during his hospitalization.
Impact of Death
George and Daniel each had a second, fatal heart attack within a year. George’s heirs knew nothing about running the business because, as the sole proprietor, George was the business. Since George failed to make provisions to transfer his business to anyone at his death, it was closed and the assets were disposed of through the probate of his estate.
Daniel had set up a Buy-Sell Agreement with his vice president. The vice president purchased the business from Daniel’s estate for an established price and the business continued to operate as before, under the vice president’s management, until the sale was completed. Daniel’s heirs did not have to worry about disposing of the business assets.
The Consequences
Had George designated someone to run his business in his absence or take it over at his death, liquidation could have been avoided and it could have continued to operate during the probate process. George’s heirs would not have been burdened with finding buyers for the assets because his personal representative could have merely transferred the business to a previously selected successor at an already established price.
Ownership interests in businesses are like any other assets. They must be transferred to someone when the owner dies. While probate is generally required to accomplish the transfer, the owner can designate who will take ownership of the business interest in a Buy-Sell Agreement.
If this agreement isn’t established before death, the business interest will pass to the spouse, children or other heirs of the deceased owner. While this may be desirable in some cases, the owner may have a business partner who prefers not to be in business with the deceased owner’s family. Or, the spouse or children do not want the business interest and would rather sell it. Overall, a Buy-Sell Agreement makes it easier on everyone involved.