Although it is not a welcome prospect, things to consider before a business owner dies are critical in the here and now. If you are a business owner who has not yet given thought to what will happen to the company you have worked so hard for, you risk losing everything for yourself as well as any potential beneficiaries. Estate planning is not just for individuals, it is essential for business owners as well. To protect all that you have built in assets, relationships, and more, it is advised for you to meet with an estate planning attorney as soon as possible so your legacy does not go unsecured.
What Happens to a Corporation When the Business Owner Dies?
In the unfortunate event that a business owner dies, one of the most frequently asked questions by personnel and relatives is, “What will happen to the business?” To a degree, this depends on how it is classified. For example, a corporation or limited liability company does not die, even if the owner does.
A corporation can live until it is either:
- Voluntarily terminated by filing papers with the state of the corporation
- Terminated by the state for issues with creditors, failure to file the proper forms, or failure to pay a state franchise tax
Aside from the above, a corporation should continue to exist even if the president or sole shareholder of the company dies.
Why Wills Are Important for Corporation Stocks
Corporations have stocks, and if the owner who owned all or even the majority of that stock dies, the stock then becomes an asset that is subject to probate. This means that the person’s will can determine who will get his or her corporation stocks in the event of their death.
In addition to having a will, some owners may choose to put corporate stock into a trust, as in some cases this can avoid probate and keep a business from ceasing to operate. If upon their death an owner wants to give stock to charity, that can be done through a will or a combination of a will and a trust. It is important to discuss this with your lawyers and accountants before taking action as sometimes there can be more advantage to making charitable contributions before death.
Giving advance thought to who will get the corporation stocks if a business owner dies is critical for both the individual’s and company’s wellbeing. Because life is unpredictable and we are not promised tomorrow, it requires both parties to be proactive now, regardless of the age or health of the owner.
The Importance of Securing a Successor Now
Business owners often have strong relationships with employees, customers, suppliers, and government agencies, and in the event that the owner passes, those relationships must be able to be maintained in their absence.
Many companies mistakenly do not consider that it could take some time for the business to recover from the death of an owner because that person may have acted as the primary agent in:
- Bringing in business
- Collecting monies owed
- Fulfilling contracts
The result is that in some cases a business owner can be difficult to replace. At the very least it may require time and money to do so. For this reason, it can be beneficial to have insurance or enough cash stored away that this can be handled without waiting.
For some businesses such as sales, accounting, and such, the owner’s personal relationship with a client or customer base is critical to the company’s success. In situations like these, when an owner passes it is not uncommon for employees or staff to panic and try to grab the business, form their own business, or take the practices and relationships to a new employer who will reward them.
To keep the business from ending up this way after the owner’s death, it is important to make good use of covenants not to compete, as well as consider the following questions now, before it becomes an issue:
- Who is going to take over the company?
- Will it be a family member?
- Will it be a current employee?
- Will it be someone from the outside?
- Is there anybody able to take over?
- Is selling the business a better way to go?
Doctor’s offices, in particular, can struggle with this type of situation because of the nature of their practice. Over time a doctor typically builds up a practice that might have value to another doctor. If the owner/doctor passes, it is critical to move swiftly in getting an executor appointed to facilitate selling their book of business to another doctor before it is taken over.
This can be true of non-medical businesses too, as if there is no one in the family or business ready and willing to take over the role of owner, it is possible the business will end up being sold to an existing competitor or someone who wants to get into that business.
A corporation needs to make sure it is governed properly in the event of the owner’s passing. If there is not someone such as a Vice President who might be designated to automatically take over, there should be a shareholders meeting. If the shareholder is dead, a probate estate should be established, and an executor or administrator appointed. The appointed party would then act as the shareholder and be able to do tasks such as taking paperwork to the bank to show the corporation is now changing the authorized signer on the account.
Determining the Valuation of a Company
It can be complex to determine the valuation of a company because there are multiple concepts for doing so.
- Sometimes a company will have value because it owns something such as process, machine, or brand name recognition. In these situations, the company has goodwill that has some value that the company will want to preserve.
- In other cases, goodwill can be more personal if the founder or owner of the company’s relationships are key in getting people to come to them to do business. In other words, a person or entity is in relationship with the business specifically because of the owner, not the company, per se.
What to Do Now If Your Business’ Success Centers Around You as the Owner
While it can be quite the compliment to have business come to you because of your personal reputation and character as a business owner, it can also be responsible for the fast demise of your company after your passing or retirement.
A company earning millions of dollars annually because an owner has made a name for himself and established and maintained critical relationships will be in trouble when the owner dies and the people they had relationships with no longer feel obligated to work with their business.
This type of set up can make a business owner almost impossible to replace unless they take action now. Ensuring a balance between the relationships they have with the customers and other people within the company is key.
For a law or accounting firm, this may look like bringing in some of the younger company executives during the process of meeting and developing clients so that if a senior partner retires, dies, or decides they want to do something entirely different, the junior partners are able to then continue the owner’s legacy.
Prepare for Changes in Existing Business Relationships After an Owner Passes
Business owners typically have unique relationships with key players such as banks and suppliers, and it is common for these relationships to change after their passing. Some examples of this can be:
- Bankers who may have felt quite comfortable in loaning a dollar a day and getting paid back the next
- Suppliers who would willingly ship goods in August and not get paid until September
Without that relationship with the owner, banks and suppliers can be much less comfortable with the state of things, which can then negatively impact the company. If a bank has your operating account and capital line, it may freeze the account and use it to pay their note if they are feeling insecure. A supplier who may not have thought twice about shipping twenty thousand dollars of goods to the business each month may reconsider if they want to move forward in the same way.
No matter how healthy or young a business owner is, it is critical to anticipate the unthinkable so that the business and beneficiaries do not suffer. Key questions for an owner to consider now include:
- Who are the shareholders?
- Who are potential purchasers?
- Who are competitors you might be willing to sell to?
- Who will take over?
- Who will have authority?
- Functionally, who will be able to take over the business?
- What is the business worth?
- How will the customer base be maintained?
- How will employee and supplier relationships be handled?
- How will the value of the business be maintained in the event of disability or death of the owner?
Because life and business can change so rapidly, these questions should be evaluated on a near constant basis. Take action today to protect all that you’ve built for tomorrow.