What Happens to Your Small Business When You Die?

There are around 32.5 million small businesses in the United States. Some are small, sole trader businesses, while others are in partnership and employ several people. Irrespective of the size of the business you own, it's crucial that you have a say over what happens to it when you die. There are several processes, consequences, and ways to control ownership of a business if a death occurs, and they depend on the facts of a specific situation.  

Type of Business  

The answer to what happens to your small business when you die essentially depends on the type of business. If you are the sole proprietor of your small business, it will terminate following your death, and the company's assets will be a part of your estate. On the other hand, general partnership businesses can survive even after one owner dies. However, it entirely depends on the decision of the surviving partner, and the partnership a greement, if any, is in place.  

Sole Trader Business  

It is easiest to deal with sole trader businesses when writing a Will because you own all the assets used for business purposes. Ideally, you can leave this type of business as part of your estate, and it can then be shared between your beneficiaries in any way you choose. However, if you are a sole trader and want to leave your business as a specific gift, you may need additional legal advice.   

On the other hand, if you own a limited company, it will have a memorandum and articles of association, which stipulates the company's purpose and how it should be run. The articles of association may also state what should happen to your share of the business when you die. So, it's essential to read these documents when you start writing a Will. If the articles of association of your business include details of what happens to the business when you die, this will usually override any wishes left in your Will.  

Partnership Business  

A formal partnership agreement generally keeps the company running if you are in a partnership business. The agreement spells out what will happen to your share of the business when you die. The terms of this agreement will nullify any wishes that you may have included in your Will. Therefore, it is vital to ensure that you carefully read the initial agreement. On the other hand, if you didn't have a partnership agreement or there isn't any such agreement at your death, the partnership may cease when a partner dies.  

Similarly, you need an LLP agreement or LLP members' agreement if you're in a limited liability partnership. The LLP agreement ensures that the LLP carries on when one of its members dies. If you're a member of an LLP, you need to acquaint yourself with the terms of the agreement before writing a Will.  

Gifting Your Business   

A sole trader or the sole director of a limited company can leave his business as a gift to a specific individual or group of people. Gifting your business after death may be the best thing for you if you have a succession plan and want your business to continue trading after you die. In most cases, if you wish to leave your business as a gift requires additional legal advice.  

Consequences  

Many problems may occur when business ownership interests transfer due to the death of an owner.  The major problem is that the surviving owners may find themselves in business with people they don't know or don't want as their business partners. This person could be the ex-spouse of a former owner or an outsider who inherited shares in the business and knows little or nothing about the company.  

The second problem is figuring out how to decide the value of the deceased owner's interest in the business. There are several ways to calculate the value of a business, and the results can vary depending on the method used. Parties that receive ownership interests will likely choose a method that provides them with the highest value of the deceased owner's share, provided the surviving owners desire to buy the transferred interests. Contrarily, the surviving owners would usually argue for a lower value to make repurchasing interests possible. Valuation disputes are common, and they can be expensive and stressful for everyone involved.  

Documents You Need to Have in Place  

While the consequences of transfers of shares upon the death of a business owner are serious, there are steps that they can take to avoid issues and decide in advance how these types of situations should be handled. Business owners can ideally create a buy-sell agreement ("BSA"). BSAs govern the transfer of business ownership interests and create a structure that makes sure that the transfers occur in an organized and fair manner. BSAs enable business owners to anticipate and control how death will impact the business, reducing the probabilities of disputes.   

Business owners should create a Will or other estate planning tool, which can be drafted to comply with a buy-sell agreement and ensure that business interests are transferred or otherwise resolved to meet the owner's goals and make sure that transfers occur just as they desired.  

No one wants to spend time planning for death, but it's vital to have a plan to distribute your business ownership if you're a small business owner. Otherwise, you would be putting your loved ones in a difficult phase after your death.