Sheehan & Associates, P.L.C.

What happens to the business if your partner dies?

When you've barely begun a business partnership, it's hard to think of all of the possible future problems you may face -- especially when one of those possibilities is that either you or your business partner could suddenly die.

Just the same, you need to establish a plan to handle the situation by asking yourself some important questions:

-- Would either of you (and could you) continue a profitable business if the other person died?

-- Would either of you be willing to accept the other's heir into the business partnership?

-- What choices do you both want to have about the future of the business and who you have to work with, if that happens?

-- What other way would you want to see your heir compensated if he or she doesn't become a partner in the business?

Once you've begun to picture what would happen if either of you died, you can begin to craft a legally-binding document that will spell out the agreement you make. There are a number of options to consider:

-- The surviving partner can buy out the deceased partner's heirs. That means that the business would have to undergo an evaluation of its fair market value and the surviving partner would have to come up with liquid assets that match the deceased's partner's share to pay to his or her estate or heirs.

-- The surviving partner could buy out the deceased partner's share in return for a private annuity. That would guarantee the deceased partner's heirs periodic payments for their lifetime (or the lifetime of the business).

-- The surviving partner could buy the deceased partner's heirs out through a self-canceling installment note. Essentially, this works like a privately funded loan that allows the surviving partner to take full ownership of the business once the promissory note is paid (or the person who holds it dies).

-- The deceased partner's share of the business can be transferred or willed to his or her heir. That means accepting that individual as a partner, so additional thought would need to be put into any clauses that would limit that person's power over the day-to-day operations of the business for a fixed or indefinite period.

Planning for a partner's death is only one step of partnership formation. For more help or advice, consider contacting a business law attorney.

Source: New York Life, "What if your business partner died tonight?," accessed March 10, 2017

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Sheehan & Associates, P.L.C.
1460 Walton Blvd , Suite 102
Rochester Hills, MI 48309

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