Your Business In Probate: What Happens To It?

If you are creating an estate plan, one asset that needs to be considered, if you have it, is your business. But a business isn’t like a house or a car; you can’t just easily leave it to whomever you designate. State laws say what happens to a company when you pass, and to the extent those laws are silent, corporate documents (which often take precedence over a later drafted estate plan) will also say what happens to your business.

Sole Proprietorships and Partnerships

If you have a sole proprietorship there is no separate legal entity to be left in an estate plan at all. The business is you, and thus, when you pass, so too will the business. Yes, you can leave the assets related to your work to whomever you designate (or else, they will be liquidated to pay any business creditors). But the business does not live on and transfer to anybody.

Partnerships are different because there are one or more partners involved. Often, the partnership agreement will say what happens when someone passes. Sometimes, the other partners will have to “buy back” your interest in the partnership (which will go to your beneficiaries), if they want to keep it going and be viable without you.

If there is no written partnership, then it will pass just as a sole proprietorship would—the partnership will legally end.

LLCs and Corporations

LLCs are similar, but because they are separate legal entities, they can be left to someone who you designate, because they do not automatically dissolve when there is a death of a manager. Often, the LLC’s operating agreement will have provisions for the death of a manager. Absent that, state laws will dictate what will happen.

With both LLCs and corporations, absent anything to the contrary in bylaws or management agreements, the interest in the company will pass onto whomever is designated, or to whomever state law says gets the property in the absence of an estate plan.

For companies, you can establish a succession plan that sets forth what will happen after you pass. Of course, that must be passed and ratified by your company, in accordance with your corporation’s bylaws or rules.

Valuing the Business

Anytime a business is part of an estate, it needs to be valued, whether so that the estate has a value for the purposes of probate administration and taxation, or so that the beneficiaries know what they are inheriting. Sometimes, a valuation is necessary if the beneficiaries will have their interest purchased by the remaining, surviving owners or managers. Beneficiaries who stand to be paid for their interest in the business, will want the business valued as high (valuable) as possible.

Business valuation is as much an art as it is accounting; there are many ways to value a business, but large business valuations can be very expensive.

Let us help you plan for your business. Call the Torrance will and estate attorneys at Samuel Ford Law today.

Sources:

scscourt.org/self_help/probate/property/closing_distributing.shtml

casetext.com/statute/california-codes/california-probate-code/division-7-administration-of-estates-of-decedents/part-5-estate-management/chapter-5-operation-of-decedents-business/section-9760-decedents-business-defined-authority-to-continue-operation-petition-requesting-order-authorizing-continued-operation