Preparing for the death of a business owner
As a famous quote goes, “Nothing in life is certain except for death and taxes.” Business owners spend a lot of time planning to minimize taxes, but all too often the troubles that cross their worried minds do not include a concern about the death of a principal officer of their business. Here are some steps that can be taken to help insulate a business from disaster upon an unanticipated death of an officer or key employee.Do not concentrate critical tasks exclusively in one person, such as check-signing authority. Having redundancy is preferable – more than one person should have authority to perform any critical function. This is especially critical when one person is the sole shareholder/director or the sole member/manager.For example, if such an individual is the only person with check-signing authority, and he or she dies, the business will be stuck in a position where it cannot sign checks or even pay payroll.If redundancy is not a realistic option because of the particular facts and circumstances with which a small business is confronted, the business owner must ensure that a procedure is in place to vest that authority in someone new if the only person with that authority suddenly becomes incapacitated or dies.The death of someone who is the sole or majority owner and the sole manager of an LLC, or the sole or majority shareholder and the sole director of a corporation, will create a void in the management, and the business will become an asset of the deceased person’s estate. Nothing can be done to appoint replacement management until the probate court blesses the creation of an estate and appoints an executor, which can take five to six weeks. The business will be paralyzed until the probate court acts.For that reason, using a revocable trust for holding the equitable interest is advisable.The business owner puts his or her interest into a revocable trust, of which the business owner is the sole trustee and the beneficiary while alive. Control can pass seamlessly upon death because the revocable trust will name a successor trustee, so control passes from the deceased individual as trustee to the named successor trustee, and there is never a gap in control.Using a trust in this fashion can provide the procedure that is needed to ensure that authority for critical tasks can be vested in a new person, as discussed in the preceding paragraph.
LLC consequencesOften a principal of a business will know who should run the business upon his or her death, but there is no assurance that the trustee would know who is the person most suitable to take control.This can be planned for by offering direction to any successors who would control the business interest and could be done by including specific language in the business owner’s trust or will naming the person who should be appointed president or manager.Additional proper planning would involve setting forth the terms of that person’s employment once in that position, if the would-be president has an employment agreement.What happens to an ownership interest of an LLC upon the death of an owner will be determined by the terms of the LLC’s operating agreement. Many operating agreements require that unless the surviving owners decide otherwise, the LLC dissolves within a certain time. This can be a trap, as upon the death of a longtime business partner, dusting off and reviewing the operating agreement is not going to be a priority. This automatic termination is a historical artifact tracing back to the early days of LLC law, and when drafting LLC agreements, business owners should not automatically include such an “automatic termination upon death” clause any more.If the owners are worried about ending up with an unintended partner upon the death of an owner, there are other alternatives available.With respect to avoiding unintended partners, it is always a good idea for owners of a closely-held business to have a cross purchase agreement or buy-sell agreement that gives the surviving owners or the business the right to buy the ownership interest of the deceased owner upon his or her death. This buy-out can be funded with life insurance.No one likes to contemplate his or her own death, and that includes business owners, but with proper planning a business owner can ensure that disruption to the business will be minimized upon his or her death, allowing family members and business partners to focus on matters that are truly important.Scott W. Ellison, a partner in the Manchester-based firm of Cook Little Rosenblatt and Manson, where he practices business law, can be contacted at 603-621-7122 or firstname.lastname@example.org.