Guide to Administering Estates with a Business Interest
When a person has an estate with a business interest, that business is often one of the biggest and most important assets in the estate. The person in charge of administering this estate after the business owner dies may face several challenges. Business interests are an important asset that must be carefully dealt with to preserve the value for the beneficiaries and heirs of the estate.
Potential Scenarios for an Estate with a Business Interest
What happens after a business owner dies? There are several possibilities, most of which depend on the type of business that the estate is now in charge of managing. The following is an overview:
- If the business was a sole proprietorship, meaning it had only one owner and was not a corporation, limited liability company, partnership, or some other entity, the business will essentially shut down. This can make the estate administration process somewhat difficult, especially if there were ongoing projects. The value of the business may also be impacted because the sole person affiliated with the business is no longer there to run it.
- If the business was owned only by the decedent but was a formal entity such as a limited liability company, it is often the company’s documents that control what will happen to the estate’s interest in the asset. Limited liability companies typically have a document known as an “operating agreement.” This agreement may contain provisions that dictate what should happen to the business in the event of the owner’s death. The document may allow for a new owner to take over the company, or it may provide a mechanism for valuing and ultimately dissolving the business during the estate administration process.
- If the business had multiple owners, such as a partnership or a limited liability company, it may continue to run. However, the surviving partner(s) must deal with the issue of either buying out the estate’s interest in the business or taking on a new partner under the deceased partner’s estate plan. As the estate’s administrator or executor, you must be sure to have the business interest properly valued.
- If the business was a corporation, the estate becomes the owner of a certain percentage of the stock in the business. Depending on the corporation’s documents, including any by-laws, shareholder agreements, and buy-sell agreements, several different scenarios may occur. This may include the corporation purchasing the estate’s shares in the business, other shareholders purchasing the shares, or the heirs or beneficiaries of the estate keeping the stock and becoming the new shareholders. Regardless of which scenario unfolds, it is again crucial for the person in charge of administering the estate to properly value the shares of the business during the administration process.
Administering an estate that has an interest in a business often comes with many potential complications. Difficulties may arise whether the business is continued or dissolved. In addition, if the business was not well organized with sufficient paperwork and systems in place, the person in charge of administering the estate may have a hard time efficiently dealing with the business. It may be necessary to bring in financial, tax, and business advisors to assist with this process.
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