Methods of Business Succession
Most people carefully consider the disposition of their personal possessions, including their homes, cars, money, and other belongings, when they prepare their wills and/or other estate documents. However, it’s just as important to consider how to handle the disposition of your business. Creating a succession plan usually starts with consideration of the type of business you have along with your ultimate wishes for its future.
Businesses that operate as sole proprietorships can be dissolved and treated as a part of the owner’s personal property along with the rest of their estate. However, some sole proprietors may wish to leave their business to an heir, in which case the business’ assets and liabilities would need to be transferred.
Partnerships generally follow a few common patterns when it comes to business succession, i.e., the partnership dissolves and the business’ assets are divided, the remaining partners buy out the interest and carry on with running the business, or an established heir becomes a new partner to take their place and the business moves forward.
Limited Liability Companies (LLCs) often follow a similar trend as with partnerships, where the business can either be dissolved or the interest of the exiting member can be purchased by remaining or new members. Because an LLC interest is treated as personal property, it can be inherited or disposed of in the same way as other personal property. If members of the LLC want to avoid uncertainty in the event of a member’s exit, the succession plan should be set out and agreed to in advance in the operating agreement that governs the LLC. If an operating agreement already exists, it can be amended to address the topic of succession planning.
In all instances, succession planning should focus on the type of business under consideration, whether its owners want it to continue on or be dissolved, and how any vacant ownership interests will be addressed. These are crucial aspects to consider at the formation of a business, but they should also be maintained, changed (if necessary) and updated as the business grows and/or plans change. If you want to learn more about a business succession plan or need guidance in forming yours, working alongside a business attorney can help ensure that everyone’s interests are taken into account and properly addressed.
The information presented here is for general educational purposes only. It does not constitute legal advice and does not create an attorney-client relationship.