How to Keep Your Business Running After the Death of Your Business Partner
A business may go haywire after the sudden death of a business partner if the partners failed to realize the importance of a partnership or operating agreement. Of course, there are risks involved because a sudden death would mean thousands of issues left unsettled, which otherwise could have been resolved if all the terms and conditions had been clearly mentioned in an agreement. What happens when a business partner dies? In case there is an agreement, it must be reviewed from time to time, and, if required, amended to take into account the significant changes in the partnership. Just because you have a provision in your will does not mean that the business will be adequately handled.
A will may effectively enable the spouse to inherit business interest on the death of the partner, but, at times, it may result in serious complications in the future. The spouse may have no skill in running the business, but would often need the income from the business or the value of the equity to survive. The other partner/partners may not be able to purchase the spouse’s portion of the business, but at the same time would be unwilling to pay because the spouse is unable to work in the same way as the deceased partner. This may lead to serious problems in the future and can be disastrous for the business as well.
If the business partners plan to take over a portion of the business when a partner dies in partnership, then they should enter into a legally enforceable partnership agreement that would incorporate all the dos and don’ts of running a business after the death of a business partner.
Common Problems That Ensue When A Business Partner Dies
- If not properly mentioned in the Buy/Sell Agreement, squabbles may ensue between the surviving partners and the deceased partner’s spouse. A verbal agreement would be of no use under such circumstances.
- In case there is no insurance to cover the contingency of the deceased partner, the surviving partners may face financial problems because they may not be in a position to borrow funds or raise the capital to payout the deceased person’s share. This could result in the closure of the business in the long run.
- Sometimes the absence of an insurance or a documented agreement can place so much pressure on the surviving partners that they may find it hard to continue with the business. The partners may not be able to find a replacement for the deceased partner and that could have disastrous consequences for the business to continue in the future.
- An insurance policy can not only cover the value of the share of the business partner, but also the debts that the business has acquired under the deceased partner and that need to be repaid after his death.
- In the absence of a proper Buy/Sell Agreement and Partnership Agreement, there is no well-defined method for valuing the business in the event of a death of a business partner. This may create problems in the future.
How To Overcome The Problems And Keep The Business Running?
All the partners must sign a Buy/Sell Agreement upon starting a business. Also referred as the “Business Will”, a Buy/Sell Agreement states the process that must be followed in the event any one of the partners die. The Agreement is signed when all the parties are in a position to negotiate and agree upon the various terms and conditions.
Signing a Buy/Sell Agreement is imperative to ensure seamless transfer of the partner’s share in business in the event of the death of a partner. As per the agreement, the executors can remove the capital of the deceased partner from the business. Also, after the death of one partner, whether the profits would be split among the other partners or they would continue to use the deceased partner’s property is also decided on the basis of the agreement.
If clearly stated in the agreement, the surviving partners may pay the outstanding debts and divide what remains among themselves. When a Partnership or Operating Agreement is signed, it is important that all the partners come together and follow the terms and conditions regarding business succession in case of the death of a partner.
The occurrence of legal issues when a business partner dies is quite common in the absence of a proper Partnership or Operating Agreement. To find the best possible solution, just contact the professionals at the Watson Firm who can suggest the best possible steps to deal with the legal problems. Just make a call on 205.545.7278 or fill the form on this page to get in touch with us now!