Owning a business is your life, but if you pass away without a will or other arrangements, everything you worked for could disappear. No plan leaves your company in limbo, and your family, business partners, shareholders and anyone else involved could fall into a massive dispute over its fate. You don’t have to leave a question mark hanging over your business after your death. Planning ahead and knowing the law will allow you to protect your most valuable asset and leave a detailed plan in your wake.
Understand Business Structure
A sole proprietorship is synonymous with its owner, despite a few legal disparities. So, if you pass away and leave a sole proprietorship behind, the business’s assets are liquidated to pay off any outstanding debts. The remaining value of the company is distributed according to your will. If you don’t have a will, then state laws will dictate what happens to the rest of the funds. Making a will is part of any solid end-of-life checklist. There’s a full guide you can review here about how to make an end-of-life checklist to protect your business and final wishes if you are ever suddenly ill or incapacitated.
Corporations are distributed to the owner of your shares, unless you are the majority owner or sole shareholder. In that instance, your will determines what happens next. LLCs have operating agreements that determine what happens if a member passes away. If the agreement permits someone to take the deceased member’s place, then a vote will be held among the remaining members to admit the inheritor. Without this agreement in place, a person’s role is usually dissolved, and their assets are distributed according to state laws. If you are part of a partnership, it must be officiated through an LLP or LP to protect your money and business entity. Without any legal arrangement, your partnership is dissolved upon your passing. All operations must cease except those which are necessary to end the partnership.
How Do I Pass My Business on to Someone Else?
If you want a spouse, adult child, business partner or even trusted employee to become the owner of your business after you die, you must establish a living trust. Living trusts contain all of your assets while you are alive, and they are distributed according to your wishes after you pass away. What’s important to consider is whether the person you’re considering leaving your company to wants it in the first place. There are many cases of family-owned operations where a child inherits a company they don’t want to run. Part of what makes a business successful is the human power behind it, so if the person in charge doesn’t have their head in the game, everything could crumble.
Make sure you have an extensive conversation with the person you want to run your business after your passing. They should be fully aware of all the work, responsibility and tax liabilities they’ll have and be 100-percent committed to running the operation. If they ultimately decide not to take over, you can have the business dissolved upon your passing. After debts are paid, any remaining funds can be administered to your loved ones through your will.
Protecting Your Business While You’re Alive
Even if you don’t intend on passing away anytime soon, you should think about how to protect your company in the event you are unable to manage it. Someone who runs their own small business needs a Plan B in the event they’re ill or unable to work. In the event of business owner incapacity, there must be tools and a guide in place that helps protect your assets and everyone who works for you.
A power of attorney is a legal document that grants someone permission to act on your behalf in certain situations. A power of attorney for business can be written to specify when it is active and what limitations in contains. For example, you may choose to have it active only in the event you are medically incapable of making decisions for the company yourself. There should also be guidelines in place to determine exactly what incapacitated means in this scenario. If you are part of a corporation, then your illness or incapacity should be handled by your company’s board of shareholders or directors. Succession plans will determine what happens to your role and assets in your absence.
Talk With a Lawyer
You might find it beneficial to speak with a business lawyer about all your options. In addition to estate planning, there are steps you can take to ensure your assets and investments are always protected from the start. You can get sound legal counsel about how to best manage your wealth and how to go about distributing any finances in the event of your death.
Lawyers can also help with processes such as trademarking, copyrighting and patenting products or company ideas. They can also draw up confidentiality and non-disclosure agreements to ensure private information remains inside the business. All of your employees should sign nondisclosure agreements prior to starting their jobs. An NDA ensures that inside information, working ideas and project developments are legally secured. Those who sign an NDA can be held legally accountable for any consequences should they reveal protected information to outside employees, clients, friends or family members.
Penalties for violating a nondisclosure agreement can range from financial obligations to criminal charges. The cost of breaking an NDA can be up to $750,000 per violation. This means each time a protected piece of information was divulged, an employee will be charged a certain amount. In corporations or enterprises, breaking an NDA can result in millions of dollars of damages.
Secure Your Assets
Are your banking accounts secure? Do you have all of your work-related information stored on encrypted hardware with strong passwords? These simple, practical strategies can prevent data breaches, theft and profit loss for every operation. You should also thoroughly explore your current legal arrangements and make sure that you don’t have anything like your car or house put up as collateral. For small business owners who aren’t registered, make sure you get an LLC or sole proprietorship established ASAP. This prevents your personal belongings from liability charges related to your work or liquidation.