Running a successful business requires skill, dedication, and the ability to look beyond the particular product or service that your company provides in order to protect the entity and its assets. Included within that last requirement is something that most do not think about on a daily basis; a plan for the business in the event of your death or incapacitation. Retirement plans have their own unique place in succession planning, but for purposes of this article, the focus will be on planning for the unexpected.
Without spending too much time on the variety of events that could result in an unexpected need for a business succession plan, it is an unfortunate fact of life that sometimes things happen that you did not have marked in your calendar. As a result, it is important to ensure that proper measures are in place to protect the business if you are no longer around.
For companies with multiple owners, provisions in an operating agreement or bylaws can direct the transfer of your interest. These provisions often call for a buy-sell agreement, whereby certain triggering events (such as death, disability, or retirement) will require a business owner to sell, or offer, their ownership interest in the business to their co-owners. The price to purchase the business interest is often either fixed or based on a fair market value formula. Finally, a buy-sell agreement will contain payment terms specifying the installments, interest, and any deposit required for the purchase of the interest.
A buy-sell agreement can take a variety of forms, including a wait-and-see plan, a cross-purchase plan, or a stock-redemption plan. For the wait-and-see plan, upon the occurrence of a triggering event, the other owners mutually agree upon who will purchase the interest of the deceased/incapacitated co-owner. A cross-purchase plan involves the agreement of the surviving owners to purchase the interest of their co-owner. Where the buy-sell agreement comports to a stock-redemption plan, the company buys the deceased/incapacitated owner’s interest.
For companies with a single owner, such as a single-member limited liability company, the owner’s interest will, upon his or her death, generally transfer in a similar fashion to the decedent’s other assets. For example, if the owner’s testamentary Will directs his/her assets to be passed down to heirs, this transfer will include the membership interest in the LLC. In certain circumstances, this result is not ideal as it can take time for the Will to be probated, during which the goodwill and success of the business may be in jeopardy due to lack of operation. If, on the other hand, an LLC’s operating agreement contains a transfer-on-death clause indicating to whom the membership interest shall be transferred, there will be no need to go through probate as the transfer will happen immediately upon the death of the owner.
The fate of the business is an important consideration for any business owner. Although there are several avenues to have the business continue upon an owner’s death, the business may also be sold or liquidated. In either event, having a plan identified in the governing documents for the company (bylaws, operating agreement, etc.) is essential to ensuring that the fate of the business stays in the hands of its owners.