One of the most satisfying things for many people is the day they finally open their own business and no longer work for anyone else. They are finally their own boss. Some business owners own their business solo, while others decide to go into business with a partner or partners. When a business partner dies, it can be difficult not only personally, but there are also legal issues that could affect the business. What happens to that business now?
Do you sell the business, liquidate the assets and split them between your partner’s heirs and yourself, or does someone from your partner’s family come in and take his or her place?
When you formed your business with your partner, you likely drafted a partnership agreement that included a clause addressing what would happen to the business if one of the partners died or became permanently disabled. If you had a Memphis estate planning lawyer assist you in drafting the agreement, he or she may have suggested one of the following options:
- The decedent’s estate takes over their share of the partnership.
- The decedent’s share is transferred to the other partner, who will make payment to the estate.
- The partner has the option to purchase the decedent’s share of the business using some type of agreed-upon financial formula.
No Partnership Agreement
If you and your partner did not draft a written partnership agreement, then the rules of the Partnership Act would apply. Every state except for Louisiana has adopted the Partnership Act into state law for business regulations.
According to the Partnership Agreement, when one of the partners dies, that immediately dissolves the partnership. The surviving partner or partners will then owe the estate of the partner who died the amount of the decedent’s share of what the business was worth on the day they died.
For example, let’s say three friends – Mike, Pat, and Eric – open a business under a general partnership but they don’t draft a partnership agreement. Each one of the men put up one-third of the capital needed to start the business. Eric dies, which then dissolves the partnership. After the business has been dissolved and debts paid, Mike and Pat receive a third of the leftover capital, and Eric’s third goes to his estate. Mike and Pat take their capital and start the business up again, only this time with two partners.
Should Partners Have Agreements to Address Death?
There are risks associated with having an agreement and risks associated with not having one. If you do not have an agreement and your partner dies, the partnership dissolves. It can take time to address all the issues that involve dissolving a partnership, liquidating its assets, and paying off the debts. What happens if the surviving spouse or other heirs want their share of the partnership immediately? They could decide to sue to gain immediate release of the capital owed to them.
There are also potential issues with an agreement, especially if the agreement says the partner’s survivor steps in as the new partner. A spouse or other family member may not be on the same wavelength as the surviving partner, resulting in a lot of disagreements
Thanks to our friends and contributors from Patterson Bray for their insight into Estate Planning When You Have a Business Partner.