What Happens When a Business Owner/Partner Dies?

Death is an uncomfortable topic. However, it’s necessary to discuss sometimes. Figuring out what happens if you die while a business owner, or what happens if your business partner dies is a real fear new or even seasoned business owners have. Preparing yourself with knowledge can alleviate some of these worries.

In the event that one of the co-founders/owners of your company dies, what does happen? How is their percentage of the business handled? What comes next? What changes are there for the remaining owners/partners?

This is a tough subject that you may not want to think about or discuss with your business partner(s), but it’s important to have a plan of action in place just in case. And it’s definitely important if this is something you’re currently going through.

How to Prepare for the Death of a Business Partner 

Being prepared in the event of a death of a business owner or partner is important. One of the most crucial steps of establishing a business with multiple owners is to develop a buy-sell agreement, essentially providing a method for the remaining owners to carry on the business of the company without any more disruption.

Business succession planning is when you and/or your partner ensure your business will be preserved the way you want it to be. According to Fidelity, a business succession plan should address the following:

• Development, training and support of successors
• Delegation of responsibility and authority to successors
• Outside directors/advisors to bring objectivity to the process (when necessary)
• Maximizing retention of key employees through equitable compensation planning for management, family/non-family employees and active/inactive shareholders

Ownership transfer planning considerations may include:

• Coordination between who will own the business and who will manage the business
• Consideration of the best interests of the business and the owner's family
• Timing of a transfer of the business during your lifetime — this may provide you with the opportunity to consult with the successor(s), and generally reduces the risk of a discounted sale of the business

You will also want to help minimize taxes and probates. All of your assets, including business assets, generally must go through probate (unless the assets allow for the naming of beneficiaries).

Business inheritance means that you leave your company or the assets to a person or people of your choosing after you pass away. That person could be your co-founder or business partner. However, this person could also be a family member, friend, another employee, etc.

The best way to protect yourself from a family member or friend inheriting part of your business is to set up a business partnership agreement. This agreement gives all partners a clear understanding of their rights and responsibilities that may arise in this situation.

After the Death of a Business Partner

In the event that your business partner passes away, what happens next? Well, for starters, the partner is disassociated from the business and partnership when he or she passes.

There can be a few different options for how this could shake out:

• The deceased’s estate takes over their share of the partnership.
• A transfer happens of the other partner’s share to you on a payment to the estate.
• You buy the share of the partnership using a financial formula.

However, if you and your business partner did not have a business succession plan then it might be a bit more complex. According to LegalVision, “If you did not create a written partnership agreement with your business partner, then the Partnership Act in your state or territory will apply to regulate what happens to your business.”

That could mean the partnership agreement is dissolved immediately upon their death. You will then owe your partner’s estate a debt for their share of the partnership that accrues at the date of their death.

At the end of the day, dealing with the passing of a business partner can take a toll on you, your employees, your loved ones and your business. Do what you can now to protect yourself and your business in the event of a death. The last thing you need is more stress and worry during a difficult time.