How to Coordinate Business Succession & Estate Planning
October 30, 2024 | Carole Clark Isakson
At some point, many business owners execute a will or trust to provide for the disposition of their personal assets. Those dispositions will either specifically or generally deal with their business ownership interests as well. However, business succession planning is also affected by an entity’s governing documents. This blog addresses the possible conflicts between the entity documents and the individual owner’s estate planning documents. Make sure your business attorney and estate planning attorney are each aware of your plans so you can avoid such conflicts.
Governing Documents Affect Business Succession Planning
When a business owner makes an estate plan, they must decide where all their assets are to go, including ownership in the business. The owner—let’s call her Sam—may wish to leave half of XYZ Properties to her three children for their benefit. So, Sam’s will or trust will state that her ownership interests in the company (or perhaps simply all her assets) are to be divided equally among her three children. Whether or not this will actually happen depends on the governing documents of XYZ Properties.
There are several forms of business entities. But no matter the type of business, the owner(s) intentionally created it, and in cases where there is more than one owner, the owner intentionally chose the other person(s) with whom the company would be owned. In our case, let’s say Sam only owns half of XYZ. And provided that Sam and the other owner sought legal counsel at the time of the company’s formation, it is likely that the company’s governing documents will include provisions on how an owner may or may not transfer their ownership interests in the company. If XYZ is a corporation, those restrictions will appear in a Shareholder Agreement or other document. In a limited liability company, the restrictions will likely appear in the Operating Agreement. See my prior blog on documents containing buy-sell provisions in business entities.
Back to XYZ. Assuming Sam and her business partner gave thought to business succession planning and ownership transfers, it is likely that they have agreed that in the event of death, the other owner will have the first option to purchase the other owner’s interests. No matter how great Sam’s kids are, the other owner would likely prefer to pay them for Sam’s interest and continue to run the business than to have the kids as co-owners. If Sam and the other owner have signed a typical agreement providing for this option, then the option will take precedence over the provisions of Sam’s will. The kids will likely receive money for the company at some value, but they won’t be splitting up the company ownership.
We Can Help You Find the Right Answer
What is the answer here? Make sure that you carefully consider where you want your business interest to go at your passing, and make sure that your estate planning attorney and your business attorney are in contact. These two departments at BGS coordinate their efforts to make sure that what the owner desires is properly reflected and will be honored. If Sam truly wants her three children to be owners, that conversation needs to happen with the other owner, and corporate counsel may play a role in helping set out the various options.
Contact the corporate department at BGS for more information on business succession planning.