Running one’s own business involves a lot of responsibilities. You need to think about so much, from hiring to marketing, branding, product development, and so on, and it’s also important to think about what might happen if you weren’t around to keep the business up and running.
If a business owner dies, the business can suffer in a range of different ways and may even cease to exist entirely. Customers, employees, and the company as a whole can be left to deal with major consequences, which is why it’s so important to work with a probate lawyer and plan for every eventuality.
When a Business Owner Dies Without a Plan
When a business owner dies without a plan, the effects can be catastrophic, and the way the situation unfolds will be dependent on several factors. One of the most important factors to take into account is the structure of the business in question. Different business structures can respond differently to the death of an owner, as explained below.
In a sole proprietorship situation, the business is solely owned by its owner. In a technical sense, the business and its owner are essentially dependent on one another. So if the sole proprietor dies without any kind of plan, so will their business.
The assets of the business will be liquidated to cover any outstanding debts, and anything else left over will then be distributed according to the proprietor’s will, as long as they had one. Otherwise, the state’s probate laws will come into effect and rightful heirs may miss out on any inheritance at all due to legal costs and administrative fees.
Corporation or S Corporation
For a corporation or S corporation, the situation is a little different, as there are several shareholders effectively involved in the ownership of these kinds of businesses. So, if an owner dies, their estate becomes the new owner of their share of the business.
The shares of stock held by the estate can then be distributed according to the will, provided that one has been made. This can still lead to many complications, however, as the shares may be passed to family members who have no interest or understanding of the business.
Limited Liability Company
For a limited liability company or LLC, the situation is different once more. An LLC is organized according to an “operating agreement”, and this agreement should usually state what should occur if a member were to die. It may state, for example, that the company can continue after the death of a member, with a new member being voted into place.
However, the agreement might not make any mention of what should be done if a member dies. In this case, the state law gets control over the situation, and in a lot of cases, assets end up getting dissolved and distributed. This can lead to the business closing down.
Partnership, Limited Partnership or Limited Liability Partnership
Finally, there are cases of partnerships, limited partnerships, and limited liability partnerships. Usually, these kinds of companies should have a “partnership agreement” in place between the key partners, stating what may or may not happen if a partner passes away.
If an agreement isn’t present or doesn’t make any provisions for the death of a partner, then the partnership effectively becomes void once a partner dies and the business will cease to be active. For this reason, agreements are very important to set up when partnerships begin.
What Happens if the Owner Passes Away Without a Will
If a business owner passes away without a will, this can lead to even more complications for their heirs. Probate law will come into effect in order to divide and distribute the assets and estate of the person in question, and this can be a costly and time-consuming process, which may lead to certain heirs not receiving what they may have received if a will had been made.
Legal Control of the Business and its Bank Accounts
After banks are signified regarding the death of a business owner, they may choose to freeze the accounts. This can lead to employees and suppliers not getting paid, which can cause businesses to shut down very quickly. Account access will not be granted, except to those who have legal permission. Again, this can cause more legal and financial complications, which is why business owners are so strongly urged to form a plan and work with a probate lawyer.