Businesses Should Give Thought to Succession Planning
Many people take time and effort to plan for what will happen to their family and their assets when they are gone. But you would be surprised to learn how many people fail to make arrangements for a certain class of people who also should be accounted for when making these kinds of plans: business partners and fellow LLC members or shareholders.
Planning for the Death of Partners
Business owners may give little thought to what will happen to their business when they are gone—or even if they do, they may not give much thought as to what will happen if one of their partners passes away. The assumption is that their business will keep on humming as usual. But that may not be the case.
That’s why any business should think about succession planning. Like so many other things, it’s always better to have an agreed upon plan than to let courts decide.
If a partner or a manager in an LLC passes away, in the absence of any written documents to the contrary, that person’s beneficiaries will inherit their interest in the business. That can leave the other business partners in an awkward situation—suddenly business partners with the relatives of their former business partner. If business partnerships are like a marriage, this situation can be like an arranged marriage with people you may know little about.
Those family members may know little about the business, may have little interest in the business, or worse, may see the business as a profit windfall for them. Simply getting rid of the new partners can be difficult, and ultimately devastating to the business—it may require a costly buyout, or worse, could lead to a judicial dissolution of the business, usually after long and protracted court action.
Options For Succession Planning
There are options to avoid this problem. The most commonly used is an agreement which sets in advance a buyout amount, which the business will pay to the relatives upon the death of the partner in order to purchase their interest. This avoids conflict over value, and avoids the business having to partner with strangers. In many ways, they are like pre-nuptial agreements, which set in advance who gets what, knowing that the future may bring uncertainties.
Negotiating these agreements can be difficult, because in many cases, the value of a business can rise or fall after an amount is fixed. Thus, these agreements may be flexible, and use formulas or other methods to determine the buyout figure.
Of course, businesses can also agree on other arrangements, like dissolving the corporation amicably with pre-set payouts from any profits of asset sales, or agreeing to take on the deceased’s relatives’ family members as partners but with limitations. A business may even opt to have the deceased’s family keep the entire business, and buy out the other partners, if there are enough assets to do so.
Succession or estate planning is not just for people; it’s for your business also. Contact Tampa business attorney David Toback to discuss protecting your business and its assets.