When you run a business, dealing with death, disability, or divorce can present a challenge. Business owners should plan ahead for these possibilities with a lawyer’s assistance. If you’re facing one of these situations now, you probably need legal advice to figure out how to move forward.
How Could Death, Disability, or Divorce Affect Your Business?
When partners or co-owners form a business, they are not always thinking about a time when the business could face a crisis. The crisis may come in the form of a pending business divorce. Or one of the partners might face a significant life change. Physical or mental disability is something that many people do not plan for in their working lives. The end of a marriage is another change that could affect your business. Moreover, the death of a partner or investor is always a possibility.
These major life events could affect your business because they could trigger provisions in your partnership agreement or operating agreement. Many business agreements contain specific language describing what happens if:
- A partner needs to exit the business suddenly
- A partner begins having serious financial problems
- A partner’s property is being divided up due to a divorce
- A partner cannot perform his or her duties as planned
Not all agreements contain this language, however. There are state “default” laws that could come into play if your business agreement doesn’t explain what happens on death, disability, or divorce of a partner. These provisions in business agreements and default provisions can lead to unexpected results for your business.
For example, you might end up with your partner’s ex-spouse owning part of your business. Or a trustee might take over your partner’s business responsibilities. The trustee might even try to sell a portion of the business (to close a deceased person’s estate or pay off debts in bankruptcy). That’s why it is important to plan ahead for these possible situations.
Planning Ahead for Death, Disability, or Divorce
Your business can add language into its partnership or operating agreement to mitigate the effect of these significant life changes. Some examples of possible provisions that you might consider are:
- A method to break a voting deadlock, should one partner die or become disabled
- Buyout provisions, to allow the other partners to purchase a deceased, disabled, divorced, or bankrupt partner’s shares in the company
- Provisions explaining what happens if a trustee takes over for a partner
- Protective provisions keeping former owners from competing with your business once they leave
Buyout provisions and other mitigating measures in your agreement must be carefully written. Sometimes, business agreements explain what will happen if a partner dies or becomes disabled. But they may not go into detail about other scenarios, like if a partner files for bankruptcy or loses their business shares in a divorce. Talk to a business lawyer for help preparing your agreement to take into account the many changes that can happen to a business and its partners.
When Death, Disability, or Divorce Hits Your Business
If you’re dealing with a business partner’s sudden death, disability, or divorce, you probably have a lot on your plate. It can be difficult to figure out where the business will stand after your partner leaves the business or sells their investment. The best resources that you have in this situation are the language in your business agreement and your lawyer.
You and your lawyer will need to carefully reference your business agreement to help you deal with changes to the business. The language in the agreement will dictate what happens when your partner deals with a life change. You may be able to buy out their shares, you may have the option to dissolve the business, or you may need to work with a new partner in their place. If the agreement is silent on these issues, your lawyer will look to the default state laws for the situation. If you need advice on how death, disability, or divorce will affect your business, call a local business lawyer right away.
We’re Here to Advise Your Business
Henke & Williams advises businesses facing important transitions such as business divorce or the death, disability, or divorce of a partner. As experienced Houston business lawyers, we help our clients find the best solution possible. We offer knowledgeable, experienced, and insightful advice for Houston-area clients. To schedule a consultation, call 713-940-4500 or use our convenient Contact Form.