A business partnership can face significant challenges when one partner passes away. Without the proper planning and agreements in place, the company’s stability, creditworthiness, and overall operations could be at risk.
A partner’s sudden death could leave you grappling with suppliers and creditors who might pull back on credit terms, employees who fear instability, and the deceased partner’s family, who may have their own set of priorities. These challenges often arise at a time when the surviving partners are also navigating grief and operational uncertainty. Learn how you can protect your business and avoid losing all that you have achieved.
Yes, it can—if you have legally binding agreements, such as a buy-sell arrangement specifying what will happen to the deceased partner’s share. Without these measures, you may be forced to dissolve or drastically restructure the business.
If you’re in a business partnership, the death of a partner is something you need to prepare for. Not only can it create emotional turmoil, but it can also have major financial and operational consequences for the surviving partners and the deceased partner’s heirs. Here are some key questions to consider and ways you can protect your business and your loved ones:
A properly arranged and funded agreement is a legally binding contract that spells out exactly what is to happen if one of the business’s owners dies. It generally calls for the survivors to buy the deceased owner's share in the business from his or her heirs. It should spell out the actual purchase price or provide an objective formula for determining the price.
With this option, the surviving owner(s) use cash at the death of a co-owner to fund the buy-sell agreement. But there are several drawbacks:
With this option, the surviving owner(s) borrow funds, usually from a bank, at the death of a co-owner to fund the buy-sell agreement. This, too, has drawbacks:
Purchasing insurance can be a cost-effective funding option for a buy-sell agreement. Typically, a policy is taken out on the life of each owner so that when one owner dies, the surviving partners now have money to buy out the family of the deceased partner. Using insurance as a funding vehicle will provide the following benefits:
Whatever option works best for you, it helps to gather all the facts before you make a decision. Your legal and tax advisors, along with qualified insurance professionals, can help you create an arrangement that best fits your needs.
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A New York Life financial professional can help determine what’s right for you.
This material is for informational purposes only. Neither New York Life nor its agents provide tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.