When a business partner dies, it can throw a company into chaos.
You don't want that to happen to the company you helped build.
So act now to assure an or derly transition in case the worst happens to you, your business partner or another co-owner.
Follow this advice from Lynchburg attorney Laura W. Keohane of Edmunds & Williams PC and SCORE Chairman Hardy Koska in Richmond:
Put a governing document in place and keep it updated. It's not mandated in all cases, but you should write up bylaws if your business is a corporation; a partnership agreement if it's a partnership; or an operating agreement if it's a limited liability corporation, Keohane said.
These documents spell out duties, responsibilities, compensation, the distribution of profits and losses, how officers should be elected and other pertinent information.
They also contain an exit strategy in case someone dies or leaves.
An exit strategy paves the way so that the remaining owners, family of the deceased, employees, even suppliers and vendors -- all of them dependent to some degree on the ongoing business -- can experience less disruption.
Albuquerque, N.M., lawyer and P-Brain Media consulting company owner Peri Pakroo said that in a partnership agreement, for example, it might be spelled out that if owner A or owner B leaves for any reason, the remaining partner will become sole owner of the company.
The remaining owner might pay the deceased partner's estate for that person's share of the business as of the date of departure. The fair-market value might be determined by the partner's accountant based on the company's book value.
Have a lawyer draft the document. "It's typically about $500, but it's worth it," Koska said. "You protect your business with good documents."
Draw up a buy-sell agreement. This document provides for the automatic sale or other disposition of an owner's interest upon death, Keohane said.
Proceeds go to the deceased partner's estate so that the family benefits, if that's the agreement.
Buy-sell agreements often are financed by life insurance policies on the owners, Keohane said. That provides a guaranteed source of funds to buy the deceased person's interest.
The agreement spells out who can buy a departing owner's share of the business, at what price and what events will trigger the buyout.
There might be a provision in the agreement that says the buyer is the surviving owner of the business. If it's a corporation with many owners, the corporation may be the buyer.
In any case, a buy-sell agreement allows for the business to continue.
Dispose of your ownership interest in a will. You could direct that your shares in the business be sold to your partner or someone else, Keohane said.
If you're the primary owner, you can leave the business to someone of your choice -- or spell out who should run the business, Koska said.
Think what would happen to the business, though, if you didn't do estate planning, or you died without a will and your interest in the company went, say, equally to your children.
Some or all of them might be clueless about running a business, or may not want to run one, and some might wish to cash out their share, which could financially cripple the company.
If yours is a family-owned business:
Train and develop one or two family members to run the business. Let them work through the various aspects of the company and develop broad experience, Koska advised. Training two people is better than one, he said. They should have experience at all levels in case anything happens to you.
Things may be humming along fine in your company today. But, "you need to look at the future," Koska advised.
Contact staff writer Iris Taylor at itaylor@timesdispatch.com or (804) 649-6349.
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