What Happens When a Business Owner Dies?

Death is always tragic and sad. But death also has business ramifications when someone who owns a business passes away. Others in the business—investors, employees, shareholders or partners, all who may have depended on the now deceased— may wonder what happens next when the owner of the business dies.

Probate and Succession Laws

Understanding what happens when a business owner dies requires understanding how probate and estate laws work.

As a general rule, property will pass to whomever is designated in the deceased’s will or other estate document. However, often, a will can conflict with corporate documents, like partnership agreements or corporate bylaws or LLC management agreements.

And if the deceased passed away with no will at all, his or her property, including interest in a business, will pass to relatives designated by Florida law (called intestate succession). Those people who inherit through the deceased’s will, or through intestacy, may not be the people that other owners, investors or partners want to work with—and they may not even have any idea what they’re doing with this newfound business they just inherited.

Types of Businesses

If a business is a sole proprietorship, everybody in the business is out of luck. The business dies with the owner, unless there are private contracts elsewhere that dictate what happens. The personal representative of the estate will either manage the business long enough to wind it down or sell the business assets.

The same goes for LLCs, except there, the LLC can survive the death of the manager.

The problem is that the deceased manager’s interest now may pass to someone who isn’t capable of running the LLC, or who doesn’t want to. If the LLC has a management agreement, that may provide further guidance as to what happens (for example, the LLC may have the chance to buy out the interest of the person inheriting the deceased member’s interest in the LLC).

The same general process happens with partnerships; the deceased partner’s interest will pass to his or her heirs unless the partnership agreement dictates otherwise.

Corporations and Shareholders

Corporations operate the same way, with the owner’s shares in the business passing to his or her heirs, either by the will, or by intestate succession. Often, corporate bylaws or shareholder agreements will have guidance on what happens (again, sometimes by giving the company the chance to buy out the inherited shares from the new owner).

But there are occasions where the person who died had so many shares, and thus, such a controlling interest in the business, that the business cannot go on. The business may be left in the hands of people who aren’t capable of handling the business, which can also lead to shareholders derivative lawsuits and ultimately, petitions by shareholders to involuntarily dissolve the company.

Let us help your business plan for the best and worst case scenarios. Contact the West Palm Beach commercial litigation attorneys at Pike & Lustig to get started.

Source:

investopedia.com/terms/s/succession-planning.asp