People who are owners or co-owners in a business have an “ownership interest” in that business. An ownership interest does not go away after a person’s death, rather it is normally transferred to their estate. Far too often, people with ownership interests die before a proper plan is created to decide who they want to transfer the business to, how or if it will be divided, or if they just want to sell the entire company upon their passing. If you are a business owner, you need to meet with an attorney to write a business succession plan or a buy-sell agreement so that your business interests are protected and passed on according to your wishes.
Business Succession Plans
A business succession plan outlines the steps a business will take to continue after an owner’s death by appointing someone else to take over the business in their place. The first step in doing this is to identify who the successor will be or designate an agent to make that decision upon your passing if it is not designated at the time of your unexpected death. The most common successors are co-owners, heirs, employees, and third parties, but it is also equally as common for an owner to sell their ownership interest back to the company itself. The next step is to determine how the ownership interest will be sold to the successor. Depending on whether the company has multiple owners, the plan for transferring an ownership interest can include options such as a buy-sell agreement, selling the ownership to another person, or even selling the entire company outright.
A buy-sell agreement, also called a “buyout” agreement, is a contract that transfers a person’s ownership interest in a business to either another owner in the company or the company itself and is automatically triggered upon their death. This agreement applies to a person’s ownership interest in any type of business, including a LLP, LLC, corporation, or any other business entity with other owners. When a person with an ownership interest dies, the company is obligated to buy back their ownership interest from the estate at an agreed-to price. This allows the business to continue as normally as possible and generate value for the person’s estate that can then be distributed according to their will.
In some instances, life insurance can be used to fund this buyout – so your family realizes the value of your interest, while also allowing the business to continue to function.
Navigating business succession plans and buy-sell agreements can come with complications and difficulties. As attorneys with experience in creating both business succession plans and buy-sell agreements, we are uniquely qualified to help you create your Virginia estate plan involving your business interests. In fact, one in four estate-planning clients at Smith Strong, PLC have investment properties or business aspects included in their own estate plan. Please call one of our offices at 804-325-1245 (Richmond) or 757-941-4298 (Williamsburg) to discuss your options.
Special thanks to law clerk Brayden Meadows for his editorial and drafting assistance with this article.