There is a famous saying that the failure to plan is a plan to fail. That appropriately addresses what happens when a business owner dies without any documents to address the transition of the business. In that case the business owner can leave a disaster for those who survive. An easy solution is to have an experienced business lawyer prepare a simple document to allow a surviving spouse, employee, or other beneficiary to instantly take over and run or wind up the business. This allows the survivor to take advantage of the value of the business at the time of the owner’s death for the benefit of whom ever the owner desire like family or charity.
What documents can you use to avoid disaster For a limited liability company,
which is the most common business entity used today in Florida, the document that alleviates problems caused by the death or incapacity of the company’s owner is an operating agreement. Even if the LLC has only one member or owner, the operating agreement can act like a Will for the business. My article titled Do I need an operating agreement for my Florida LLC on LLC operating agreements is a quick read and contains helpful information about those.
For a corporation, the bylaws and shareholder agreement should contain continuity provisions specifying who will take over in the event of the demise of the owner. In Florida, the LLC has eclipsed the Inc. as the preferred business entity because only one governing document is needed as opposed to two. Also, the protections are the same but the management and documentation requirements are less for the LLC. My article entitled Which is better the Inc. or the LLC discusses the differences between these two types of entities in more detail. What can I do to prepare for a transition In addition to having properly drafted governing documents like an operating agreement prepared by your corporate lawyer, a prudent measure is to develop a transition plan. The operating agreement will say who takes over, but the internal transition plan will tell that person what actually do. This transition plan is similar to what you would prepare for any disaster response. But this transition plan must be balanced against the needs of the business to protect its proprietary information.
To put it in other terms, the operating agreement is like telling everyone concerned that person X gets everything in your safe. The transition plan would tell person X how to open the safe. What is a business transition plan and what should be in it A business normally has clients, vendors, and may have employees or independent contractors. The client and vendor information may be confidential or even a trade secret. The business may have other trade secret information, trademarks, and a virtual presence like social media and e-commerce accounts. The owner may not regularly share all of that information with employees and contractors or the employees and contractors may be subject to confidentiality, non-compete, and/or non-solicitation agreements. Therefore the business owner can prepare that information but need not share it with anyone until a triggering event occurs.
As long as the person tasked to take over the business or another trusted person other than the business owner knows of the existence of the document, whether paper or digital, or its location is defined in the operating agreement or other writing, then when the triggering event occurs the document can be easily retrieved. Ideally it would contain information about the operations of the business and how to contact important parties like vendors and clients.
The transition plan should also include passwords and log-in information for all of the businesses online accounts or the location of those so the party tasked with taking over the business to run it or wind it up can more easily do so. Whether to continue to operate the business, to sell it, or to wind it up would be up to the person into whose hands the business owner placed the business in the operating agreement. Depending on the circumstances that decision could be made by that person alone or together with others. How does this transition plan apply to single member LLCs and multi-member LLCs If the LLC has multiple members, then the operating agreement will normally contain a provision for the disposition of the deceased member's shares. For example in those cases the shares may automatically revert to the company upon a member's death imposing a purchase obligation on the business to pay the member's named beneficiary under an agreed formula over a specified period of time. The surviving member or members may already know how to fully operate the business but where the deceased member had some specific knowledge of certain operations a transition plan and cross training between members will ensure the continuity and success of the business they worked hard to build.
In contrast where the company has only one member, the operating agreement and transition plan becomes even more important to allow for a smooth transition and can even be useful where the owner does not die but just decides to sell. That transition plan can add to or take the place of a post-sale management agreement where the owner stays on to show the buyer how to run the business. When used in this manner, the transition plan can add great value to the purchase price akin to selling the business with a user manual.
As to what every business owner needs to know before selling their business my article on that topic is accessible by clicking the highlighted text. What is a business wind up As mentioned above the person identified in the operating agreement to take over the business must often decide whether to sell it, run it, or close it. The closure of the business it called the wind up.
When a business decides to close or is forced to close it undergoes this wind up process. Corporations are regulated in this regard by Chapter 607 of Florida’s Statutes. The wind up of limited liability companies are handled by Chapter 605. Those statutes instruct business owners how to properly wind up their business so that the owner or owners are not exposed to any liability from the business after it closes.
The basic concept for both the Inc. and LLC is to amass the assets, provide notice to creditors, and pay them before insiders. If a business owner simply takes all the money or assets to the detriment of the creditors and closes the business, the owner can expose him or herself to the claims of those creditors and may lose the protections that the business provided.
A business can cease to exist in one of three ways. First, it can be administratively dissolved if it fails to file its annual report. In that case without a proper wind up the owner or owners can still be exposed to liability. Secondly, it can be judicially dissolved if the governing document allows for that and the parties file a lawsuit. That lawsuit in common parlance is called a corporate divorce and takes the place of the wind up because it is done within the lawsuit. The third method of closing a business is a voluntary dissolution. In that situation the owner or partners meet and vote on articles of dissolution. The operating agreement may address how the wind up will occur and the votes needed for dissolution. It can also address what happens if some partners want to dissolve the business and others do not. Conclusion The business has a choice of not having any governing documents like an operating agreement and accepting what the Florida legislature has deemed appropriate under the applicable statutes or taking control of the situation with its own governing documents.
As an experienced and seasoned business litigator who has tried corporate divorces with and without operating agreements or bylaws and shareholder agreements in court I believe that it is always prudent for business owners to protect the assets they have worked hard to develop by having an operating agreement. Likewise sophisticated business owners will embrace the idea of a transition plan and prepare that so their diligent efforts to build a successful business will benefit whomever they decide should take over that business if they are incapacitated or perish. An experienced and seasoned business litigator can help your business in preparing these and other important business documents. My articles on those other options are available at DavidSteinfeld.com.
