In North Carolina, generally, the answer to this question depends on (1) what type of business you own; (2) whether you have bylaws or an operating agreement; (3) whether you have a will; and (4) if you have an insolvent estate.
No matter what type of business, your interest in the business is an asset. Unless there’s a contract stating otherwise, it is an inheritable asset, meaning if you have a will, you can name who the interest passes down to, or if you do not have a will, the interest will pass to your heirs (spouse, children, etc.). If you want to pass your business interest to your son, who will run the family business, instead of it passing naturally to your spouse, you need to have a will drafted.
When the individual and the business entity are interwoven, like a sole proprietorship or a partnership, it is important to note that business debts are oftentimes personal and can cause your estate to be insolvent (leaving nothing for your family). This is an important reason to form a business entity separate from the individual. If your business is not healthy, it may cease to operate at your death and wipe out your estate.
If you have a contract with other members of the business, you can state what happens to your interest when you pass. This is one of the reasons why we urge people who are going into business with non-relatives to enter into operating agreements – do you really want to be working with your business owner’s spouse after the pass away? More importantly, what happens if the spouse has no interest in running the business? What if she wants to sell or have you buy her out? What if you cannot afford to do so? In addition to recommending our clients enter into operating agreements, we recommend that they incorporate buy/sell language into these agreements. Financial professionals can find inexpensive ways to fund these agreements so that a partner can afford to buy another out.
If you own stock in a corporation, that stock will be passed to your beneficiary or heirs just like any other property. While this is not a big deal if you own stock in AT&T, for example, it is a big deal if you own 90% of the shares of a small, family owned business. Again, maybe your business partner does not want to own the corporation with your spouse.
If it is your wishes to continue your business when you pass, and your family is onboard, it may be a good idea to put your business interest in the name of a revocable trust. This way, your business interest stays out of your estate when you pass away and the trustee can manage your business interests better than the executor can. Many attorneys will recommend to executors to liquidate business assets because there is too much potential for liability on the executor’s part if he/she attempts to continue to operate the business.
We recommend that all individuals get an estate plan in place. However, as you can see, there is more planning to be considered when that individual is a business owner. Feel free to contact Jesson & Rains if you have questions about your business or estate plan.
“One size fits all” is the wrong approach to take when dealing with estate planning and business documents. And when you purchase legal forms from the internet, that is exactly what you are getting. For estate planning, no person’s circumstances and wishes is going to be identical to the next. For businesses, while forming the LLC or incorporating may be simply accomplished by using the Secretary of State’s forms (no need to even use RocketLawyer, here, for example), what about the other documents that you may need to go with it? We’ve talked about the importance of operating agreements before. Those are absolutely not one-size-fits-all.
Here are some risks:
1) The document may not be valid at all. I have personally had a client bring me a form he purchased online that was advertised as North Carolina-specific that was NOT valid in North Carolina. He wasted money on that form and then paid me to re-do it, when it could have been done correctly the first time. Attorneys oftentimes say, “Pay us a few hundred dollars now to do it right the first time or a few thousand dollars later to fix it.”
2) While valid, the document may not be the best. Admittedly, the online legal form websites sell forms that are likely valid. They put just enough stuff in there to make them valid. However, they leave out state-specific clauses and references to statutes that may save you and your family or business tremendous time and money in the future. Here are some examples:
a. Attorney’s fees provisions. In North Carolina, these are only valid in some types of contracts and only if reciprocal. Without these clauses, you could be out thousands of dollars if a dispute arises. Or, you could have a false sense of security thinking you will be entitled to attorney’s fees if a dispute arises, only to find out that your type of contract or the way the clause is written does not allow for attorney’s fees.
b. Leases. Did you know that if a tenant breaches a lease, other than for non-payment of rent, you cannot evict the tenant unless the lease specifically provides for such? This has happened to a client of ours – the lease did not provide for it, and he was stuck with that tenant. Also, you can put language in a lease that waives notice requirements prior to evicting them. Online form leases do not contain this language.
c. Wills. We have already discussed the very important language that can be included in a will that will save your executor time, money, and stress when they are handling your estate. It goes without saying, the only way to ensure that your last wishes are accomplished is to hire an attorney. There’s no way of knowing if you use an online form. I have spoken to attorneys who litigate estate cases (after someone has died, for example contesting a will on behalf of a beneficiary, or just asking the court for guidance in interpreting a will) and their business is booming thanks to online legal forms.
d. State laws are different. North Carolina treats non-compete clauses and forum selection clauses differently from Florida, for example. Laws are created by the courts, too. A legal form website is not going to be current on courts’ interpretations of a state’s statutes. Just take a look at LegalZoom’s terms of service: “. . . LegalZoom cannot guarantee that all of the information on the Site or Applications is completely current. The law is different from jurisdiction to jurisdiction, and may be subject to interpretation by different courts. The law is a personal matter, and no general information or legal tool like the kind LegalZoom provides can fit every circumstance. Furthermore, the legal information contained on the Site and Applications is not legal advice and is not guaranteed to be correct, complete or up-to-date. Therefore, if you need legal advice for your specific problem, or if your specific problem is too complex to be addressed by our tools, you should consult a licensed attorney in your area.”
3) While valid, the document may be worse than not having one at all. You may leave language in an online form that actually puts you in a worse position. A business owner may do something that puts him personally liable for the business. The devil is in the details. In a case out of Canada, a poorly placed comma cost a business nearly $1,000,000.
4) No attorney-client relationship. By having personal interaction with an attorney, the attorney can draw information out of you that is important that you did not know was important. As a layperson, you don’t know what you don’t know – and that’s what you pay an attorney for. Hopefully you develop a long-term relationship with your attorney. You can continue to seek advice from someone who knows the ins and outs of your business or knows your family. On a different note, an attorney is a fiduciary who owes a duty to you. If they do something incorrectly which costs you money, you can sue the attorney for malpractice. You cannot do this with online legal forms.
As simple as your legal issue may seem, there is value in consulting with an attorney. The document itself, in my opinion, is free.
A buy/sell agreement governs how, when, and why partners/owners leave a business, as well as other types of events. A partner’s interest in the business is an asset, and assets are affected at death, divorce, and bankruptcy. As a business owner, you do not want a partner’s death, divorce, or bankruptcy to detrimentally impact the business, right? All of these contingencies can be planned for in advance. We typically encourage our clients to incorporate these provisions in their partnership or operating agreement right from the very beginning, but the buy/sell agreement can be a stand-alone contract.
There are a lot of decisions to be made when going into business with others—naming your business, marketing, capital and profit sharing arrangements, etc. Unfortunately, partners do not always think about the end game, which is exiting the business. Maybe there is a disagreement between the owners as to the future of the company. One partner may want to sell while another doesn’t. If one owner wants to sell just their interest and retire, do the other owners have any say to whom the owner sells to? Should the other owners get the option of purchasing the interest first? If a partner passes away, a family member could inherit their interest, leaving an unsophisticated person running the business with you. Even worse is divorce—during the equitable distribution of a couple’s finances, an ex-spouse could become part owner of a business or force the sale of the spouse’s interest.
Another important concept that many people overlook is how they are going to be able to afford buying another partner out. Oftentimes, having that much cash on hand is impossible. An installment payment plan can be provided for in the buy/sell or operating agreement. To protect against death, life insurance policies are a great way to fund the buyout of a partner who has passed away. The company or the other owners buy policies for each other (but not themselves), and upon the death of a member, the company or owners receive the life insurance benefit. That money can be paid to the family of the deceased as payment for his or her interest in the business.
Finally, buy/sell or operating agreements can stipulate the type of valuation that should be used if and when an ownership interest is sold. There are three main types of business valuation methods: Asset Approach, Market Approach, and Income Approach. Even if business owners agree on who should purchase the interest, if they haven’t previously agreed upon the valuation method, the owners could come up with different valuations and be forced to file a lawsuit and have the court decide.
In the event that business owners have not planned for these almost-certain future events, depending on the terms of the operating agreement, a court can force the dissolution of a business. Many business owners avoid hiring attorneys because of the cost. However, it is important that business owners consider the comparatively small cost of hiring an attorney to assist them with these matters now, as the future cost could be much, much higher, and their business could suffer or be forced to close as a result.
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