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Planning for when a business partner dies

On Behalf of | Aug 18, 2014 | Business Formation And Planning |

Texas business owners who are partners in a profitable company may wonder what would happen if their partner died. If the partner’s spouse or children inherited their portion of the business, continued business management may be unchanged, or it may become impossible to tolerate the new partners on a personal level. However, there are legal actions one can take to prevent an unfavorable situation.

While businesses are structured differently, oftentimes partners will incorporate to gain protection of assets and tax benefits. Both partners may serve as owners and operators, often done with limited liability corporations. Assuming that there are two owners, if one member of the corporation dies, the corporate structure may change. The person who inherits the business may suddenly be cast in the role of co-operator. The ability to forecast whether the new co-owner would be suitable to the business’s overall presence, however, is impossible. For that reason, many business owners favor partnership agreements that delineate how the company is run, how profits are divided, how much is put back into the company and what will happen if one partner dies.

In this situation, partnership agreements allow the owners to decide whether to allow the family of the deceased partner to inherit their portion of the business or to force a buy-sell option. This allows the business to be sold by the inheritors or bought by the remaining partner. Having a life insurance policy in place to pay for this is not uncommon. Coordinating the business plan with each partner’s will or trust fund is also recommended.

Business owners with similar concerns may find it beneficial to speak to an attorney concerning a viable succession plan. The attorney may provide insight into a way to plan for present operation, future growth and changes in ownership.

Source: My SA, “How to succeed in business by controlling succession“, Paul Premack, August 11, 2014