As a small business owner, we know that you’ve lovingly grown your business from the ground up. You’ve worked late nights and long weekends to ensure that everything is taken care of—and now your business is flourishing. You’ve researched employment laws and ensured your compliance, created a foolproof leave policy, and maybe even opened a second location. You’ve taken every precaution to prepare and protect your business from anything that could potentially occur. With all these major milestones behind you, it looks like clear sailing ahead!
There’s just one more thing you’ll need to consider…
What happens when something happens to you? You’ve taken care of your business as long as it’s been around, but what happens when major life events occur, and you can’t anymore? Circumstances like death, divorce, and arrest often come unexpectedly—and there may be no time to take care of your business should these occur. Thankfully, it is possible to take certain steps to protect your business, should something happen to you.
Here are just a few of the major life events that it’s essential to prepare your business for beforehand:
In Case of Death…
No one likes to consider their own mortality, but unfortunately, it’s just one of those major life events to take into consideration. You won’t be around forever, so it’s essential to decide how you want your business to be handled after your death. The most common way to do this is by creating a succession plan, which will determine who will take over the business when you die. The business structure will strongly influence what type of action you should take, and what a succession plan or other legal document will cover.
- If you’re a sole proprietor, it’s especially important that you create a succession plan, since the business will most likely die with you if you do not specify otherwise. The estate will likely liquidate your business assets to pay off the business debts, and anything left over will go to pay off your debts. Anything left over after that will be distributed like any other asset. In a sole proprietorship, you = your business.
- If you’re running a business as a partnership, you must have a formal partnership agreement that will list what happens if any of the partners die. This document should stipulate whether a deceased partner’s interest can be sold or purchased, and the arrangements for doing so. If you do not have a formal partnership agreement, death legally dissolves the partnership regardless.
- If you’re a member of an LLC, the terms of your LLC’s operating agreement should specify what will happen if any of the members die. Most operating agreements will allow for the continuation of the business on the death of a member, but if the agreement does not specify you run the risk of having the business dissolved per state law.
- If you are incorporated as either a S-Corporation, or a C-Corporation, you may need a shareholder agreement so that the surviving shareholder or the business can purchase the shares of the deceased. At a minimum, you need to ensure that your Will designates who will become owner of your shares in the corporation so that continuity of ownership can occur.
Regardless of the organization structure, having a well thought out succession plan is imperative to ensure the longevity of your business. Similarly, it is important that you let your family know that such a plan exists, and where it is located so there is not a lot of wasted time, and potentially lost opportunity, when it comes to implementing the plan. Finally, you need to make sure that you update the plan over time so that you are taking into consideration changes that occur during the normal course of any business.
In Case of Divorce…
Separating from a spouse is difficult in the best circumstances, even when there are no children, no shared assets, and a prenuptial agreement. When you introduce a business into the mix, it only becomes more stressful and complicated—that’s why you’ll want to protect your business against divorce from the get-go. You can protect your business from inside the marriage with things like a prenuptial or postnuptial agreement, but there are also certain steps you can take inside the business itself. While these won’t protect you from divorce itself, they’ll go a long way to ensuring you keep your most valuable asset during the separation process.
- If you pay yourself a salary, you draw a line between your business and your household. In the event of divorce, your spouse may not be able to claim that none of your income went into the household.
- If you set up a partnership, corporation, or LLC, your business operations will be protected by these business structures. It is important that you create documents that include provisions that protect the interests of other partners and business members in the event that any of the owners gets divorced.
In Case of Arrest or Jail Time…
If you are arrested, you may be concerned about how your business will survive without you. In a situation like this, there are many factors at play, including the charges filed against you and the structure of the business you run. In most cases, you will want to bring in experienced legal counsel in order to assess the individual situation and advise you on your options. That said, here are some things to keep in mind throughout the process:
- If you are sentenced to jail time, you cannot operate a business from inside jail. Some business owners are able to delegate day-to-day operations to another member of the business, and resume management after completing the sentence.
- If you are a partner or a member of an LLC, be aware that many ownership agreements include an “expulsion clause” in order to protect the business in case of any egregious actions taken by other owners.
While we all hope to avoid the worst-case circumstances like those major life events listed above, it’s always better to have a plan and not need it than vice versa. By taking precautions like implementing a succession plan, including your business in your will, and even putting together a prenuptial or postnuptial agreement, you’re investing in the future of your business beyond the time that you’re able to spend running it. That way, you can ensure that your business will continue operating long into the future.