A business can be one of the most valuable things a person owns. It may also depend heavily on the owner’s knowledge and daily work. If the owner dies without a clear plan, the business may pass through the estate under rules the owner never chose. An Ashburn estate planning lawyer can help business owners decide who should own the company and who should have the authority to run it.
Does your business automatically go to your spouse?
Not always. The answer depends on how the business is owned and whether the owner left a valid will or trust. It may also depend on the company’s governing documents.
When a Virginia resident dies without a will, the person is said to have died intestate. Virginia law then decides who receives property that is part of the estate. A surviving spouse often receives the estate. However, the result changes when the owner leaves children or other descendants who are not also descendants of the surviving spouse. In that situation, the spouse generally receives one-third of the estate while the owner’s children and their descendants receive two-thirds.
These rules can divide a business interest among people who have different goals. One heir may want to continue the company. Another may want to sell the interest and receive cash.
Does the type of business change what heirs receive?
Yes. A sole proprietorship has no legal identity separate from its owner. Its assets may become part of the owner’s estate. The personal representative may need to protect those assets before they can be sold or distributed.
Corporate shares can also pass through an estate. A personal representative may exercise voting rights while the shares remain in the estate. However, a shareholder agreement may limit transfers or require the company to purchase the shares after an owner’s death.
An LLC works differently. Under Virginia law, an heir who receives an LLC interest does not always receive full management rights. The heir may receive only the right to profits and distributions. Becoming a voting member may require approval under the operating agreement or Virginia’s default rules.
Can your family keep the business running?
They may be able to, but legal ownership is only one part of the problem. Someone also needs authority to pay workers and deal with customers. That person may need access to bank accounts and company records.
A business may slow down while the estate is being opened. Important decisions can also be delayed if no one knows who has authority. Employees may leave if they believe the company’s future is uncertain. Customers may also look elsewhere.
An Ashburn estate planning lawyer can help create documents that give a chosen person clear authority. The plan can also explain what should happen during a temporary period of illness or incapacity.
What happens if several people inherit the business?
Shared ownership can create conflict. Family members may disagree about whether to sell the company or keep it open. They may also disagree about who should manage it.
An operating agreement or shareholder agreement can reduce this risk. It can state who may receive an ownership interest after a death. It can also require a buyout. The agreement may use a valuation method that helps the parties set a price.
Without these rules, heirs may own an economic interest in a company they cannot manage. The remaining owners may then have to work with the estate or negotiate a purchase. That process can become costly and slow.
What should a business succession plan include?
A useful plan identifies the person who should take over. It should also explain whether that person will inherit the company or purchase it. The plan may include an operating agreement or shareholder agreement. A will or trust can then coordinate with those documents.
Life insurance may provide money for a buyout. It may also help the family while the company adjusts to the owner’s death. The business should keep clear records so the personal representative can identify accounts and contracts.
The plan should be reviewed as the company changes. A new owner or major increase in value may require an update.
When should you create a succession plan?
The best time is while the owner is healthy and able to make careful decisions. Waiting can leave family members with uncertainty during an already difficult period.
Brandon Davis, Esq. helps Virginia business owners coordinate their company documents with their estate plans. To speak with an Ashburn estate planning lawyer about protecting your company’s future, reach out online or call (540) 425-8278.
