Did You and Your Business Partner form an LLC?
Do You Know What Happens If Your Business Partner Dies or Divorces?
Death and divorce are probably two most uncomfortable topics for family members and business partners to discuss. No one wants to start the unpleasant conversation, yet these are necessary topics to consider when forming a business. Figuring out what happens if your business partner dies or divorces is best addressed before either of these events become reality.
** In the event that one of the company co-founders or owners dies, what does happen?
** How is their percentage of the business handled?
** Are you prepared to become partners with your deceased partner’s children?
** What happens if your business partner divorces their spouse?
** Could the court order you to be in business with your partner’s former spouse?
These are all tough questions. Even if you do not want to discuss these matters with your business partner(s), it is important to understand whether your LLC agreements address these contingencies and have a plan of action in place just in case. And it’s definitely important if this is something you’re currently going through.
WHAT ARE BUY SELL PROVISIONS? WHY ARE THEY NEEDED?
One of the most crucial steps in creating a business with multiple partners is agreeing on buy-sell terms, which could be part of the company agreement for your limited liability company or could take a form of a separate agreement for a corporation. Buy-sell agreements essentially provide a method for the remaining partners to carry on with the business without the concern of becoming partners with unintended parties, such as the former business partner’s ex-spouse or the deceased partner’s family members.
WHAT HAPPENS WHEN YOUR BUSINESS PARTNER DIES?
First of all, the deceased partner is disassociated from the business, whether it is a partnership, corporation or limited liability company, when he or she passes. There can be a few different options for how this could shake out:
- The deceased’s estate takes over the deceased member’s share of the business.
- The deceased’s estate sells the membership interest back to the business upon a payment to the estate.
- You buy the share of the partnership using a financial formula and insurance proceeds.
WHAT HAPPENS IF THERE IS NO AGREEMENT?
However, if you and your business partner did not have an agreement providing for transfer of the partner’s interest upon death, business succession might become a bit more complex. In some cases, it could mean that company is dissolved immediately upon one of the partners’ death. The surviving partner might also owe the later partner’s estate a debt for their share of the partnership that accrues at the date of their death. In Texas, combination of the company agreement, the Texas Business Organization Code and the deceased partner’s Last Will and Testament will govern what happens to the former partner’s share of the business.
WHAT HAPPENS WHEN YOUR BUSINESS PARTNER DIVORCES?
Texas is a community property state, and as a result, your spouse has the right to half of any business interests you created or acquired in the course of the marriage. If you and your business partner did not address the possibility of a divorce in a buy-sell or transferability agreement, then the judge will handle the division of the business as part of the divorce proceedings. While the specifics of asset division in a divorce will depend on many factors, some of which include other assets available for division in the divorce, the spouse’s professional qualifications and whether your business requires specialized licensing, in absence of a prior written agreement which would often require the spouses’ consent, the outcome will be unpredictable, very fact specific and ultimately up to the judge.
DO YOU NEED A BUSINESS SUCCESSION PLAN?
Planning for business succession is part of running a business. Dealing with the death or divorce of a business partner can take a toll on you, your employees, your loved ones and your business. Don’t wait! Do what you can now to protect yourself and your business. The last thing you and your business need is uncertainty during a difficult time.