Why Every Business Needs a Succession Plan

​​What Happens To a Business When the Owner Dies?

When a sole proprietor dies, the business’s assets and accounts receivable become a part of the owner’s estate. With or without a Will, the Surrogate’s Court must appoint a representative of the estate before anyone can wind up the sole proprietorship, which can take months. During those months, if no one has access to company funds, the bills will go unpaid and contracts unfulfilled.

If the sole proprietor’s heirs are minors, determining what is next for the business and its assets is even more difficult and time consuming. Who owns the business is crucial for determining next steps. You can transfer your ownership interest to a trust to alleviate the need for Court intervention. Whoever you choose as your successor trustee can handle your business affairs immediately. Choose that individual wisely.

Corporations and LLCs can have multiple members which may reduce the impact of a decedent’s death, but depending on the role the owner plays, it can still be devastating. For LLCs, an operating agreement is a valuable tool for outlining the responsibilities and rules members must follow and what happens if one of them cannot. For corporations, bylaws or shareholder agreements ease the business succession process with guidelines for ownership, voting rights, and transfer of shares.

The Role of Buy-Sell Agreements

Developing a buy-sell agreement should be considered by all those with an interest in a partnership, LLC, or corporation. A buy-sell agreement allows co-owners to purchase and sell interests in the business at an agreed upon price and procedure in the event of certain future circumstances like another owner’s death, disability, or incapacity.

Buy-sell agreements are protective for both the business and the owner’s family. The agreement terms can restrict the sale of business interests to certain parties or create re-sale options for other existing co-owners. The buy-sell agreement can provide the owner and family with compensation which can be used to offset the loss of income.

Life Insurance as a Succession Tool

Insurance is another important business succession tool. For partnerships, a buy-sell agreement allows each co-owner to get life insurance on the life of the other owner. The surviving owner receives the death benefit and to fund a “buy out” of the deceased owner’s interest.

In New York, unless a partnership agreement indicates otherwise, a partner’s death causes the partnership to dissolve. Dissolution may also be a reality if the sole member of an LLC passes away or becomes disabled. Key person insurance is a life insurance policy utilized to compensate a business for the loss of a crucial team member. The business pays the premium and is the beneficiary of proceeds if anything happens to their key player – whether it be disability or death. The benefit can be used to recruit, hire, and train someone to replace the key person or make up for the profit loss incurred.

Succession Planning is Key for Both Family-Owned and Large Businesses

Without a succession plan, a business owner’s family and/or co-owners are forced to make quick and stressful decisions. Having a procedure in place is invaluable. For family-owned businesses, disputes may occur when there is a shift in power. Even in larger companies, the unexpected loss of a leader may cause employees to depart for fear of what lies ahead. An estate planning attorney with business experience can give you peace of mind and help steady the longevity of your business.

By Nancy Burner, Esq. and Erin Cullen, Esq.

Nancy Burner, Esq. is the Founding Partner, and Erin Cullen, Esq. is an Associate Attorney at Burner Prudenti Law, P.C. Burner Prudenti Law, P.C. serves clients from New York City to the east end of Long Island with offices located in East Setauket, Westhampton Beach, Manhattan, and East Hampton.