Death of a Business Owner

What happens to a business when one of the owners has died?

The first step is to determine what type of legal entity the business is. A small business will likely be either a sole proprietorship, a partnership, or a corporation. This section assumes that the legal entity was formed under New York law. To confirm whether a business was formed under New York law or to find out what kind of business it is, visit the New York Department of State website at www.dos.state.ny.us.

What is a sole proprietorship?

In a sole proprietorship, an individual conducts business and holds title to property in his or her name and is directly liable for the obligations of the business. No formalities are necessary to conduct business as a sole proprietorship. No organizational documents are drafted or filed.

What happens to the sole proprietorship upon the death or disability of the sole proprietor?

Because the existence of the sole proprietorship depends upon the personal efforts of the sole proprietor, the business generally ends upon the death or incapacity of the sole proprietor and the business assets and liabilities become part of the sole proprietor's estate. Because no distinction is made between the proprietorship and the proprietor, all the proprietor's assets may be used to meet his or her debts - business and personal.

Typically, the sole proprietor's business will be liquidated as part of the estate disposition (either by selling the specific assets of the business or by a sale of the business as a going concern). Alternatively, a trustee or "fiduciary" may seek legal authority to continue the business on behalf of the proprietor's estate and, if the sole proprietor's will so provides, the assets and liabilities of the business may be passed on by will to a designated person as a going concern.

How can a fiduciary obtain authority to continue the business on behalf of the sole proprietor's estate?

New York law provides that a fiduciary may file a petition with the New York Surrogate Court to continue a sole proprietor's business (other than a profession) on behalf of the sole proprietor's estate. The petition must state that the deceased proprietor was the sole owner of the business, and include facts demonstrating that it is in the best interests of the estate that the business be continued rather than liquidated. The filing of a petition does not grant an automatic right to a proceeding before the Surrogate's Court and the court may decline to consider the petition. If the court finds that it is in the best interests of the estate, the court may then make a decree for continuation of the business although the decree may provide restrictions, conditions or requirements and incidental relief, including a direction or permission to incorporate the business. Once the petition has been granted, the fiduciary must keep the business and remaining estate assets separate. Any creditor or other interested person may apply to the court for an order requiring the fiduciary to discontinue the business.

What is a partnership?

A partnership is an association of two or more persons to carry on as co-owners of a business for profit.

What happens to a partnership when one of the partners dies?

The death or incapacity of a partner will have a different impact and will require different treatment depending on the form of the partnership and the nature of each partner's involvement. In a general partnership, the death of a general partner legally dissolves the partnership, and the deceased partner's interest in the business must be settled. All business activity, except as necessary for winding up the partnership affairs, must cease. On the other hand, a limited partnership or registered limited liability partnership (a partnership for professional services) is not automatically dissolved upon the death of a limited partner. For this reason, it is important to consider both the nature of the partnership entity and whether the deceased partner was a general partner (personally liable for debts of the partnership) or limited partner (not liable for the debts and obligations of the partnership). If you didn't take the necessary actions to be a limited partnership or limited liability partnership, you're a general partnership.

If the partners of a limited partnership or limited liability partnership have entered into a written agreement that provides for the effect of the death or incapacity of a partner or the sale and purchase of a deceased partner's interest, this agreement will control. Such an agreement may establish a mutually agreeable purchase price for each partner's interest and may contain a provision for adjustment of the purchase price. The partnership may also have provided for life insurance to fund the purchase obligation by providing, upon the death of a partner, the immediate cash necessary to purchase the deceased's interest.

What are the surviving partners' rights in partnership property?

Generally, specific partnership assets (land, leases or equipment that are owned only by the partnership, etc.) are not transferable inheritance. Similarly, management rights in the partnership are an asset that belongs only to the partnership and cannot be transferred to a partner's heir.

What if there is no written partnership agreement?

In the absence of an agreement to the contrary, the surviving partner or partners succeed to the ownership of the firm's assets as a liquidating trustee. The relationship between the surviving partner(s) and a deceased partner's estate is fiduciary in nature, particularly with respect to the remedies available if there is a breach of this trust. In this role, the surviving partner(s) must make a fair and complete disclosure of all facts affecting those assets.

In the absence of an agreement entered into during the partners' lifetimes providing specifically for the continuation of the business, there are two alternatives at a partner's death: (1) the business may be reorganized or (2) it may be terminated (that is, liquidated or wound up). You should consult an attorney if you wish to reorganize or liquidate the partnership.

What is a corporation?

A corporation is formed by filing formal documents with the relevant state agency.

What happens to a business if one of the shareholders in a corporation has died?

Because the corporation is an entity separate from its owners, the death of an owner has no institutional effect on the corporation absent an agreement to the contrary. When a shareholder dies, his or her shares are distributed to the heirs as personal property. That said, agreements requiring that a corporation buy out a shareholder, at least upon retirement or death, are not uncommon. Accordingly, the certificate of incorporation, bylaws, and any relevant shareholders' agreements or other corporate organizational documents should be reviewed to determine whether such an agreement exists. In addition, the certificate of incorporation may require the dissolution of the corporation upon the occurrence of a specific event. It should be reviewed to determine whether the death of any or all of the shareholders requires dissolution.

What if the remaining shareholders no longer want to continue to operate the business?

If the remaining shareholders decide that they no longer want to continue as a corporation, New York law does allow for the dissolution of a corporation. Consult an attorney if you wish to dissolve the business.