Continuity refers to something occurring in an uninterrupted state or on a steady and ongoing basis. In part II of our 3-part series, we will investigate three of the many ways in which a business, governed by an LLC agreement, can continue operations when an owner/operator dies or experiences incapacity.
Business continuity planning becomes more involved when a business has multiple members, partners or employees. What happens if one partner passes away or becomes incapacitated? Answers to this question are varied, but here are some of the most common ways to address this situation.
- Properly prepared operating agreements: Many times, business partners create an LLC for liability protection but fail to craft comprehensive operating agreements citing no need for “that mumbo jumbo”. Operating agreements play a critical role when death or incapacity takes place. Topics that should be included in such agreements are (at minimum):
- Company’s contact information
- Listing of all partners names, roles, and responsibilities
- Listing of percent of shares owned by each partner
- Emergency operations policies and procedures
- Disability and death planning
- Guidelines for business meetings, taking votes and financial decision making/accounting
- Buy-Sell Agreements: In the same vein as an operating agreement, yet different, a buy-sell agreement outlines, in contractual language, specific occurrences that automatically trigger the disposition of business shares should a partner retire, pass away, become disabled or just leave the business. This type of agreement creates valuation mechanisms as well as guidelines for the how and the who of the sale and purchase.
- Key-Person Life Insurance: Key-person insurance is a type of life insurance for which the business pays the premiums on behalf of an owner or executive. The insurance payout can be used for many things including business operations, payroll, and capital expenditures. It is also a great way for remaining business partners to potentially buy the shares of a deceased partner from an heir if necessary.
It is important to plan, IN ADVANCE, for the distribution of your personal assets as well as the distribution of business assets. Email us or comment below to learn more about how business continuity planning can benefit your business and your family.