What Happens to Your Family Business After You Die? By Randy Michel on May 09, 2023

If you have a family business, have you ever thought about what will happen to it, when you die? It may be a morbid subject to think about, but it will be well worth the time—both financially and in peace of mind, and for you and your family.

Two over-arching questions should be asked. First, what type of business entity is your family business? And, do you have a Last Will & Testament?

I. A Sole Proprietorship

A sole proprietorship is a business structure where the entire entity is owned by one person. If you are a sole proprietor, you are the only owner of the business. This type of entity is one of the easiest and cheapest businesses to start up. When a sole proprietor dies, the business will also terminate if there is no Will left to hand over the business to your spouse, your children, or next-of-kin. This is because the business is tied entirely to you—you and the business are one and the same (a single owner).

The assets will be sold to settle any pending business debts and any remaining proceeds will be distributed according to Texas probate laws on intestacy (where you die without a Will). Upon your death, the revenue from the business will begin to end. If the business debts are substantial, there could be very little left to distribute to your heirs (next-of-kin).

Writing and executing a Will ensures the continuation of the business. A Will places the ongoing business with the person you have hand selected and makes you consider the persons whom you have left behind. A Will forces you to plan properly for what happens to your family business when you are no longer around.

II. A Partnership

A partnership is a business structure involving two or more persons. A partnership agreement can be oral, but professionals highly recommend that the agreement be in writing. And for good reason. A written, signed partnership agreement will clearly state what happens to your partnership share and the entire business when you die, or your partner dies.

When there is no written partnership agreement, or when you die without leaving a Will, a myriad of issues arise and are left to your loved ones to resolve. The laws of intestacy (dying without a Will) invade the analysis once more. Your partnership share of the business descends to your spouse and children. How will your business partner feel about that? Are your spouse and children mentally and physically equipped to take on the business? They may opt to sell your shares and may not be obliged to sell your shares to your business partner. How will that make your long-time business partner feel? This could foment serious disagreements between your family members and your business partner, thus affecting the entire business. Without a Will, all the time, money, and emotional energy you poured into the business is doomed. Perhaps you also need key-man insurance or a financial adviser to assist you in how to plan for this unexpected event.

III. Limited Liability Companies

A family business that is a Limited Liability Company is run under a set of operating agreements or a constitution. Therefore, there is a specific way to handle the business in case one of its members dies. If the operating agreement or constitution allows, a new member may be appointed through voting to take your place after you die. If the operating agreement is silent on the subject, and if you died without a Will, your company shares are passed to your spouse and children under the laws of—you guessed it—intestacy. Without a Will, you cannot transfer your share of the LLC’s profits, losses, and distributions to your preferred successor.

IV. Corporations

If your family business is a corporation, then it likely has more than one director and more than one shareholder. One of the best features of a corporation is that it usually survives the death of one of its directors, officers, or shareholders. If you die without a Will and you happen to be the sole shareholder, however, your estate becomes the new owner of the business until its closure. Your shares of stock in the corporation are distributed according to the dictates of the law of … yes, intestacy. That is, your wife, your children or next-of-kin will be the new shareholders. But there will be some delay in all of them becoming shareholders.

The probate judge will have to assign a person to determine how many shares goes to each of your heirs.

V. Conclusion

It is crucial to write a Will no matter if you are married or single, with or without children, and despite how large or small your family’s assets are. The absence of a Will is likely to deter your business from growing and succeeding as you would have desired. Beyond that, the absence of a Will may bring about a devastating outcome after you pass away. Don’t let the absence of a Will ruin your family’s business and obliterate the time, money, and energy you poured into it. What kind of legacy are you leaving behind?

Seriously consider engaging a financial adviser to assist you with business succession and associated issues. A financial adviser can be invaluable in this kind of planning.

Contact my office, or a competent, experienced estate planning attorney in your region, to assist you in drafting a Will that will help you leave behind your family’s ongoing business to your preferred successor.