How business partnerships work when there are multiple heirs

When several people inherit a stake in a business partnership

• It can be a volatile time for the business as multiple people, all of whom are grieving, are added to the situation.

• Find the succession plan, if the business has one. It provides detailed plans on how to proceed in the event of a partner’s death.

• Next, dig deep into the health of the business and its plans for the future to determine whether you are up to the task of helping to run the business.

• If you want to take a step back from your responsibilities, you have many options, ranging from being a silent partner to selling out altogether.

When a loved one who co-owns a business passes away, the family and the business partners often find themselves drawn together by both their grief and their financial relationships.

Especially if there are multiple heirs with a claim to a partnership stake, maintaining operations while still in the acute pain of loss can be difficult and confusing. Considering that 90 percent of American businesses are family-owned, it’s a common situation—and it brings its own set of financial and emotional challenges.

To keep the company running smoothly during this huge transition, understanding your options is crucial. 

First, assess the situation

Whether this is a situation you have prepared for or one that has come as a complete shock, your first step is to find out as much as you can about the health of the business and its outlook for the future so that you can make informed decisions. 

Because of the financial, tax, and legal issues that heirs must work through, it is always a good idea to get the advice or assistance of an attorney. Your lawyer, along with financial professionals if needed, can help you conduct a due diligence review. 

Make sure you have copies of bank statements, the most recent balance sheet, budgets, the business plan, and the existing debt schedule. Other documents you’ll likely need: the last three years of tax returns, current incorporation paperwork, customer lists, and business licenses and permits. 

What’s the succession plan?

If there is a will, the succession plan will likely be spelled out as part of the estate plan. In fact, some types of businesses require a succession plan as part of their partnership agreement—a legal document that includes provisions on how the organization will be run and outlines each person’s rights and responsibilities.

The partnership agreement determines what happens with a partnership, limited partnership, or limited liability partnership after one of the partners passes away. Similarly, limited liability corporations are required to have an operation agreement that includes what happens in the event of a death. 

Partnership agreements also delineate clear areas of focus for all partners—outlining the complementary skill sets that fuel the organization’s success. It is helpful to understand what talents your loved one was contributing to the business so you and your fellow heirs can determine whether you can fill their shoes. 

When there’s no succession plan

The truth is that most companies operate without a succession plan. According to a 2016 Deloitte survey, 64 percent of family-run companies have no plan in place at all.

Some types of businesses do not require any sort of succession plan, and so most of them simply do not feel the need to draw one up. With a corporation or an S corporation, for instance, the estate becomes the new owner of the business, which can be passed down to multiple heirs. A sole proprietorship is not required to have a succession plan because in the eyes of the law, it dies with the owner. 

If your loved one did not create a will, then in most cases the remaining business assets will be distributed according to state law.

How do multiple heirs complicate matters?

If there is just one heir to a business partnership, that person generally assumes their loved one’s place in the business or chooses to sell it, often to the other partners. But when more than one person inherits their loved one’s share of the company, the partnership becomes more complex, both financially and personally.

If the succession plan laid out in the partnership agreement spells out each heir’s rights, responsibilities, and decision-making power, the business can carry on as it has in the past, just owned and operated by a larger group of people. Consensus may be more difficult to achieve with this larger group, so the business must adjust to its new organizational structure to thrive.

Especially in the early days after a partner’s death, the newly added partners can create seismic changes to the business—either by selling shares, seeking a larger stake, or even advocating for a sale to a third party or a dissolution. This can be a volatile time for any business, especially since everyone involved is in deep grief.

What are your options if you inherit a share of a partnership?

Being handed part of a business your loved one built is a daunting responsibility, especially if it means working through decisions with multiple heirs as well as other business partners. But there are many ways to expand on their legacy if you choose to keep your stake in the business. 

First, you can keep an ownership stake without having responsibilities or decision-making power in the organization—a good option if you want to stay on without taking more on your shoulders.  

If you would rather step aside, you often can sell your share to other partners or owners. A buyout can be structured in many ways, depending on your company’s bylaws and the type of business. One of the most common ways to transfer shares is through a cross-option agreement with the surviving business partner or partners.

In a cross-option agreement, which is often a part of the business succession plan, the shareholders of the business have an option to buy the shares from your loved one’s estate, and the estate has an option to sell the shares. 

The agreement usually sets a time limit for options to be exercised, normally within three to six months of the partner’s passing. And in many cases, the business has one or more life insurance policies designed to pay out proceeds that can be used to fund the purchase of your loved one’s shares. 

Another option you can exercise, in some cases, is the dissolution of the business. Depending on the laws of the state in which it is incorporated or based, you may have the option to dissolve your partnership as long as you obtain a majority vote to terminate the business. 

If you decide to take steps to dissolve, the profits and debts of the business are divided evenly among all of the partners, including the estate of the partner who has died.

Whatever you decide, the business your loved one built is likely a large part of their legacy. Whether it dies with them or thrives under a new generation of leadership dedicated to keeping the organization alive depends on you, and how you and your fellow heirs decide to proceed.

You may be eligible for free bereavement support. Empathy can help with everything from funeral planning to estate administration, with step-by-step guidance and real-time expert support. Many people get free premium access to Empathy as a benefit with their life insurance claim. We partner with New York Life, Guardian Life Insurance Company, Bestow, Lemonade, and other leading carriers. When you make your life insurance claim, talk to your representative about whether Empathy is a benefit they offer.