When a loved one dies, the process of distributing assets correctly and navigating probate can be complex. However, this becomes all the more complicated when the deceased person (“decedent”) owns part or all of a business. What happens during probate can make or break a business, especially if the decedent did not leave clear succession and estate plans.
At BrewerLong, our Orlando probate attorneys and staff understand how to guide business owners through the intersection of probate law and business.
Contact us to learn more about how you can protect your business, your loved ones, and your legacy through comprehensive, efficient planning.
How What Happens During Probate Affects Business Operations
Probate is the process of legally transferring a decedent’s assets to new owners. When the decedent owned or controlled a business, probate can significantly affect the business’s day-to-day operations and longevity.
The potential impacts vary primarily by the business’s structure, how much control over the business the decedent had, and how effectively the business and decedent prepared to transition control and ownership.
Potential Harms to the Business
Complications may arise during probate that risks harm to the business, like:
- Delays to ownership transfer, potentially disrupting business operations;
- Challenges with leadership and direction for the business moving forward;
- Requiring the estate to manage and operate the business during the probate process, risking the sale of business assets to pay off estate debts or vice versa;
- Obtaining a detailed valuation of the business, which may cause delays and incur additional costs;
- Misalignment with you or your loved ones’ plans or expectations for distributing the estate, especially if business assets are a large portion of the estate;
- Tax liabilities affecting the business’s liquidity or forcing the sale of business assets;
- Disputes and tension among and between loved ones and partners, risking business disruptions and damage to crucial business relationships;
- No one or the wrong person having the authority to control the business and meet ongoing contractual obligations; and
- Employee uncertainty about job security, potentially impacting morale and retention.
You can mitigate many or all of these issues through a proactive, coordinated succession and estate plan.
The Impact of Business Structure
What happens to a business interest when its owner dies typically varies by the business’s structure, as follows:
- Sole proprietorship—the owner directly and solely owns the business, so the business generally ends;
- Partnerships—the deceased partner’s interest typically transfers according to a partnership agreement or through probate, which may require the remaining partners to buy out the deceased’s share;
- Limited liability companies (LLCs)—ownership transfer occurs according to an operating agreement or through probate; and
- Corporations—the corporation transfers the decedent’s shares according to company bylaws, a shareholder agreement, or through probate.
Generally, if you have the right to decide what happens in the business, operational documents likely limit your ability to transfer your ownership interest without the consent of your business partners.
The Impact of the Decedent’s Relative Share of Control and Ownership
The probate process typically varies depending on whether the decedent owned or controlled a majority of the business. If the decedent did not own or control a substantial part of the business, it typically experiences less disruption.
The remaining owners retain control, and the probate process primarily focuses on transferring the decedent’s share within the limitations set by the business.
When the decedent owned or controlled most or all of the business, their estate and the probate process may substantially influence the business’s future. The probate process will require more time and cost, and failing to make a comprehensive plan is more likely to impact the business negatively.
Strategies to Protect Your Business During Probate
Coordinating your estate plan with your succession plan is crucial to establish a smooth transition process. By creating clear guidance for your loved ones and business partners, you can protect your business’s future, prevent disputes between and among business partners and family, provide for your loved ones, and ensure your legacy remains intact.
Estate Planning Strategies
Effective estate planning can help crucial business assets bypass probate and ensure the business has what it needs to continue operating. To accomplish this goal, you may:
- Place business assets in a trust, allowing them to transfer outside of probate;
- Use life insurance to fund the purchase of the decedent’s share in the business; and
- Include clear instructions in your will about who will manage or inherit the business.
By combining these strategies with succession planning, you can avoid the disruptions and uncertainty caused by probate.
Succession Planning Strategies
Carefully designed succession plans can provide clarity, prevent conflicts, and guide your business forward even in your absence. Succession planning typically requires approval from others with significant ownership interests.
Succession plans often use buy-sell agreements, establishing terms for transferring ownership interests after an owner’s death. Operating and shareholder agreements also frequently outline what happens to ownership interests and decision-making authority if an owner dies.
Protect Your Business’s Future with BrewerLong
The probate process can pose serious challenges for business owners, but proactive planning can ensure that what happens during probate does not harm your business or your loved ones. Contact BrewerLong today to learn how we can help you protect your business and your future.
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