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What Happens to Your Business When You Pass-Away?

February 28, 20249 min read

“Legacy is not leaving something for people. It's leaving something in people” - Peter Strople

Imagine you own a business that's doing well, but you're thinking about moving on because it's a lot of work. What happens when you're ready to leave the business? Making the change in ownership smooth can be simple with some planning. Here are some important things to think about when you're getting ready for these changes.

UNDERSTANDING OWNERSHIP

When we talk about ownership, we mean how much of the business someone owns. This includes things like getting a part of the profits, having a say in decisions, and sharing losses. The kind of business you own, such as an LLC, partnership, or corporation, decides how ownership moves to someone else.

So let's break that down using some basic Business Structures:😍

1. LLC (Limited Liability Company):

  • Imagine you start a small business, a lemonade stand. You own the business with 100% ownership. In an LLC ownership is called "Membership Interest".

  • If you want to leave this lemonade stand business and have someone else take over, you can sell or give your Membership Interest to them. This is like passing the lemonade stand to someone else.

  • With an LLC, it's usually pretty easy to transfer ownership because you and your friend can decide how to do it. You will have to update some paperwork to show the new owner's name and let others know of the ownership change.

2. Partnership:

  • Let's say you and your friend start another business together, a pet grooming service. In this business, you'll both own the business with 50% "Partnership Interest". That is what ownership is called in a Partnership.

  • If you want to leave, you have to talk to your friend and decide what to do with your share of the business. You might sell it to your friend or find someone else who wants to be a partner.

  • In a partnership, it's really important to have a plan ready in case someone wants to leave. This plan helps make everything go more smoothly. You and your partner must have the plan written down, usually inside of your Partnership Agreement.

3. Corporation:

  • Now, imagine you started a corporation company that makes and sells toys. At first you owned the company's shares at 100%. But years later as the company grew, you decided to let others own some of the shares as well.

  • So you sold a piece of the toy company to some other people who wanted to be part-owner. Now, you own 70% of the company and lots of other people own parts of the other 30% of this company. You've given them each a "Stock Certificate", which acts as proof of their ownership in the company. These certificates show how much of the company they own.

  • In a corporation, ownership is transferred by buying or selling shares of stock. This process usually involves paperwork to make sure everything is done correctly.

Today as you are reading this post, think about who should have your ownership interest in your business.

Each kind of business has its own rules for passing on ownership so you will have to plan accordingly. It might involve a lot of legal and money stuff. But don't worry, you've got this!

Now that we've seen examples of different types of businesses above, let's talk about what happens to your ownership upon your death. What if you pass-away unexpectedly? Does your company's paperwork clearly explain what will happen in that event?😲

That's right! Let's dive in. Here are some things to think about:

PASSING ON OWNERSHIP SHARES

Passing on ownership shares can be tricky if you make it that way. Make sure that all of your documents are updated to clearly express what happens upon your death:

There are a few important things to keep in mind. First, you need to follow the rules that are set out, like what's written in agreements between the owners and what the law says. This helps things go smoothly.

Different kinds of businesses have different ways of passing on ownership, so you need to plan accordingly. Whether it's a small family business or a big corporation, the process can be different.

Having a good plan in place is key. This means having clear rules written down and getting advice from experts like lawyers and financial advisors. They can help make sure everything is fair and legal.

Taxes are also a big deal. Each type of business has its own tax rules, so it's important to understand them and plan ahead.

It's also important to keep everything up to date and legal. This means checking regularly to make sure everything is following the law and there are no problems.

Planning for the future of the business is important too. This means thinking about who will take over when the current owners step down and making sure everyone is prepared for the change.

Talking to people who have been through this process before can also be helpful. You can learn from their experiences and get ideas for what might work best for your situation.

There are lots of tools and professionals out there who can help with planning, like legal documents and financial tools. They can make the process easier and more successful.

Passing on ownership can sometimes come with challenges, like disagreements among family members or getting non-family members ready to take over. It's important to think about these things early on and have a plan in place.

Lastly, it's important to recognize that there can be a lot of emotions involved in passing on ownership. Being prepared for these feelings and providing support to everyone involved can make the transition smoother.

When a person dies, the relevant documents for passing on ownership shares may include some of the following documents.


28 Documents for Planning Your Business Succession

When a person dies, the relevant documents for passing on ownership shares may include some of the following documents.

  1. Will: A legal paper that says who gets a person's money and stuff after they die.

  2. Trust Document: Papers that set up a trust, which is a way to hold and manage someone's money or property for someone else.

  3. Estate Planning Documents: Other papers related to planning what happens after someone dies; like who can make decisions for them if they can't.

  4. Succession Plan: A plan that says who will take over running a business when the current owner leaves.

  5. Death Certificate: This paper shows that the person has passed away, which is needed for the ownership transfer.

  6. Probate Documents: These are papers from a court that help decide what happens to the person's belongings after they die.

  7. Certificate of Ownership (for LLCs): A paper that shows someone owns part of a Limited Liability Company (LLC).

  8. Operating Agreement (for LLCs and Partnerships): A set of rules for how a business runs, like who's in charge and how decisions get made.

  9. Partnership Agreement (for Partnerships): A written plan that says how partners in a business share money, make decisions, and do their jobs.

  10. Bylaws (for Corporations): A document that says how a company should be run, including rules for meetings and who has power to make decisions.

  11. Articles of Incorporation (for Corporations): Paperwork that creates a company, stating its name, purpose, structure, and who owns it.

  12. Shareholder Agreement (for Corporations): A contract that lays out what rights and responsibilities owners of a company's shares have.

  13. Stock Certificate (for Corporations): A piece of paper that shows who owns shares of a company.

  14. Minutes of Shareholder or Member Meetings: Notes from meetings that say what was talked about and decided.

  15. Minutes of Board of Directors Meetings: Notes from meetings that say what was talked about and decided by the company's leaders.

  16. Buy-Sell Agreement: A plan that says what happens if someone wants to sell their part of the business or if someone else wants to buy it.

  17. Transfer Documents: Papers that make it official when someone buys or sells part of a business.

  18. Employment Agreements or Contracts: Papers that lay out what a person's job is, how much they'll be paid, and other details.

  19. Certificate of Incumbency: A paper that shows who's in charge of a company.

  20. Financial Statements: Papers that show how much money a company has, how much it makes, and how it spends money.

  21. Power of Attorney: A paper that lets someone make decisions for another person or company.

  22. Deeds or Titles (for real estate owned by the business): Papers that show who owns land or buildings that a company has.

  23. Loan Agreements: Papers that lay out the details of a loan, like how much money is being borrowed and how it will be paid back.

  24. Insurance Policies: Papers that promise to pay for certain things if something bad happens, like if a key person in the company gets sick or dies.

  25. Business Valuation Report: A report that says how much a company is worth.

  26. Consent Forms (for transferring ownership): Papers that say it's okay to buy or sell part of a business.

  27. Non-Disclosure Agreements: Papers that say you can't tell anyone about certain things, like secrets about a company.

  28. Non-Compete Agreements: Papers that say you can't start a business that competes with the one you work for or used to work for.

Let's picture this scenario: You and a friend launched a bakery together, operating as either a partnership or an LLC. However, you didn't plan for unforeseen circumstances, like if one of you became unable to work. Now, imagine your friend falls ill and can no longer contribute. Since you didn't prepare for this situation, the state steps in and applies its default rules for partnerships or LLCs. This could mean the business is dissolved or passed on to your friend's family, regardless of your intentions.

But here's the thing: having a partnership or LLC agreement allows you to set your own rules for various scenarios, such as illness or departure. By establishing these agreements, you can protect your business and partnership from unexpected events. Now, consider this: Some states have specific laws governing LLCs in the event of a member's death. These laws regulate how ownership interests are transferred and whether the LLC continues to operate. LLC owners should take time to understand these state regulations and incorporate them into their operating agreements and succession plans.

Similarly, partnerships may also be subject to state regulations concerning what happens when a partner passes away. These regulations vary by state and can include default rules for partnership dissolution and asset distribution. However, partnership agreements can override these default laws, allowing partners to customize the terms for succession planning. It's essential for partners to be familiar with both state laws and the rules outlined in their partnership agreement to ensure compliance and effective planning for the future.

Understanding what happens to your business in your state is important, especially if you're unable to run it anymore.

Happy Planning!

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Toni Simon

Toni Simon is a finance and accounting expert with a dynamic career beginning during the Enron scandal. She rapidly advanced through top investment and insurance firms, gaining deep knowledge in capital markets, insurance, and compliance. Pursuing an MBA, she broadened her expertise, notably in trusts. Toni’s entrepreneurial spirit led her to establish a successful tax consultancy, catering to a diverse clientele including small business owners, entertainment celebrities, Grammy Award-winning artists, and renowned YouTubers. Committed to community service, she's an active member of Sigma Gamma Rho Sorority Inc and serves as a Pastor. In her personal life, Toni enjoys crafting handmade soaps and vegan cooking. Her journey reflects a blend of professional excellence, community dedication, and personal passions, making her a standout in her field.

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© 2016 BALANCED PRO, LLC

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by VNCI VISUALZ