Business owners know that even the best plans can’t cover every possible situation and risk. However, there are some contingencies that owners should prepare themselves for. One of them is the possible death of another owner. This can be devastating in particular if the owner is a “key employee” in the business. Nothing can bring that person back and all that he or she means to the other people involved in the company, but certain planning can be put in place to soften the effects of this tragedy.
One aspect of this is to have an agreement between the owners that addresses what will happen if one of them passes away. This is often times referred to as a shareholder or buyout agreement for a corporation or an operating agreement for an LLC. It covers “if the company is required to buy out the deceased owner’s interest or whether the owner’s spouse or beneficiaries can retain the stock or LLC interest”. This is a vital issue because I have found that my clients have very strong opinions on whether a buy-out should be required in particular for it to in some cases provide the financial resources to support a surviving spouse.
A related issue is how that buy-out will be paid for. A successful business creates a significant value for the owners and arranging for the resources to buy-out a deceased owner can avoid financial hardship. In doing this, business owners should consider purchasing some type of life insurance. This would provide the liquidity and funding for the purchase upon the death of an owner. If you have already done that, it’s important to regularly review the policy and the agreement to determine if it still adequately covers the amount of the buy-out.
These are just some of the issues that business owners should be addressing when they plan for the possible death of an owner. If I can be of any assistance with this planning, please let me know.