Sole proprietorships, S corporations, and LLCs: when the owner dies
If a business is a sole proprietorship, it ceases to operate upon the owner’s death. As for what happens to business debt and assets when the owner die: hey become part of the personal holdings.
If a business is a corporation or an S corporation, the estate becomes the new owner of the business.
If a business is a limited liability corporation, it is required to have an operating agreement that includes what happens in the event of a death.
If a business is a partnership, limited partnership, or limited liability partnership, what happens depends upon the terms of the partnership agreement.
Keep in mind what happens to debt when a business owner dies:
All businesses have one thing in common: There’s someone in charge. In a family business, that is often someone you love. And when that someone passes away, there are many considerations concerning who will be in charge next.
Whether or not you have an active role in the company, chances are that you have spent a lot of time at the office, you know the basics of the industry, and you know many employees by name. Very often the success of the business is tied directly to the relationships and trust your loved one has built over the years with colleagues, staff, vendors, and business networks. That’s why making decisions about the business can seem so personal.
Sole proprietorships and S corporations: when the owner dies
When a business owner dies, what happens next depends on the type of business, whether there is a business continuity plan or other type of succession plan, and whether there is a will. In most cases without a will, the remaining assets of ownership are distributed according to state law.
If the business is a sole proprietorship, it ceases to operate upon the owner's death. Its assets and debts become part of the owner's holdings, and the estate is distributed according to the terms of the will.
Unlike sole proprietorships, corporations or S corporations do not automatically cease to exist when a business owner dies; instead, the estate becomes the new owner of the business. In situations where heirs or beneficiaries inherit the business equally, their decisions about the future of the business may require separate legal transactions, especially if they disagree about their roles or the business’s future or if one wishes to buy out the others.
What happens to an LLC when the owner dies
Limited liability corporations (LLCs) are required to have an operating agreement that includes what happens in the event an LLC owner dies.
If this agreement allows the LLC to continue after the death of an owner, the surviving owners, if any, can vote to buy out the heirs’ shares, allow continued sharing in profits and losses (financial interests) but not in managing or voting (managerial interests), or add the heir as an owner with both financial and managerial authority.
In the event of the death of a single member LLC, the operating agreement determines what happens as well. It will cease to exist when the owner dies, unless there are provisions for the LLC to live on after its owner.
If you are sole heir and there are no other surviving owners, you can generally choose to continue running the business or close it altogether, according to state law.
What happens with partnerships, limited partnership or limited liability partnerships (LLPs) depends upon the partnership agreement. Generally, in a formal partnership, the shares transfer to the estate.
The heirs continue to share in the partnership's financial interests but cannot participate in managerial interests. If the partnership’s debts are higher than its assets, the estate may end up owing the business money. If there is no formal partnership agreement, the death legally dissolves the partnership, and all business activity ceases except for the steps necessary to close out the partnership.
What happens to the house when a business owner dies
Each type of business—whether sole proprietorship, S corporation, or LLC—is handled differently when a business owner dies. But, generally, the business’ debts are not the responsibility of heirs.
So, a family home or any other major asset that is part of your loved one’s personal holdings would not be factored in to inheritance issues with the business.
When the professional is personal
As with any situation in which you are grieving, pain and uncertainty can make decisions difficult. If you have to make hard choices about the future of a business, giving yourself space to accept the loss and heal can help you make sure your emotions are not interfering with your responsibilities to your family, employees, employees who are family, and employees who are like family.
To make matters more stressful, you may find that you have very personal feelings about things that may be merely a business matter to others. You may also find that some employees take your decisions about the business very personally.
You may find that some employees take your decisions about the business very personally.
As much as you need time to mourn your loss, you do still need to be mindful of your situation’s legal requirements. State laws governing the structure of the business often dictate how much time you have to make certain decisions, especially if you are selling the company or ceasing operations. If there are employees, you need to continue to pay them, as well as meet the contractual obligations of the business. Even when a solid succession plan is in place, you can either decide to sell the company and offer the shares to employees/partners/family members, or name a successor.
As you navigate the tricky—and sometimes surprising—feelings you have about the future of your loved one’s business, it can be helpful to have the support of a knowledgeable and impartial professional, such as an attorney or business consultant. A trusted advisor can help you weigh your options and remind you to make timely decisions.
Honoring the business legacy
For someone who owns their own business, their professional identity is often significantly intertwined with their personal identity. For that reason, any obituary you publish should include information and anecdotes about the person’s business career path and legacy—especially if you will be continuing the business.
Because of the personal nature of the relationships in family-owned businesses, a death can be disruptive and destabilizing to the employees. They will be stunned and sad, as you are, as well as worried about their jobs and professional futures, especially if the death was unexpected.
If you are able, delivering the news personally before any announcement is published is a reassuring gesture. You can also hold a memorial onsite, and let people know how they can honor their employer if they wish (e.g., with donations to a particular cause or organization). Likewise, many employees and associates will also want to attend the funeral.
These expressions can be comforting to you and grounding for employees and other business associates, and they will give you the chance to state your vision for the company’s future.
As time goes on, you may want to create a foundation, scholarship fund, or activity day in your loved one’s name, either as part of the business if you are continuing to operate it, or as part of the community if you are not.
Many business owners enjoy being “larger than life” in their careers, and you can take comfort in the ways you are helping their name live on.
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.
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