What kind of business it is decides a lot
The SBA's descriptions of the common structures explain why. A sole proprietorship doesn't produce a separate business entity: the business is you, so its assets and debts are your assets and debts, and they pass with the rest of your estate. A corporation, the SBA says, has a completely independent life separate from its shareholders, and keeps doing business when a shareholder leaves. Your shares are what pass.
An LLC sits between. The SBA notes that LLCs can have a limited life in many states, and that when a member leaves, some states may require the LLC to be dissolved and re-formed, unless there's already an agreement in place for buying, selling and transferring ownership. That agreement is the point of the next section.
The business's own papers come first
An operating agreement, a partnership agreement or a shareholders' agreement usually says what happens to an owner's share when that owner dies: whether it passes to the heirs, whether the other owners must or may buy it, and at what price. A buy-sell agreement does the same job on purpose, often with life insurance on each owner to fund the purchase.
If yours has these papers, your family needs to know where they are, and your executor needs to read them before anyone acts. If it doesn't, your state's default rules fill the gap, and they may not be what you'd choose. An attorney in your state can draw up what's missing; PassOn's attorney finder searches by state.
Who can act in the meantime?
Someone has to sign checks and answer the phone the week after. In a corporation or an LLC that's whoever the papers already name as an officer or manager. In a sole proprietorship it's usually your executor, once the court has appointed them, which takes time. The SBA notes that a sole proprietor can decide alone to close, while any kind of partnership needs the co-owners to agree.
Write down, now, the three people who'd need to be called first: your attorney, your CPA or tax preparer, and whoever at the business knows how the money comes in.
Keep it running, sell it, or wind it down
Those are the choices, and the papers above may already have made one for you. If the business is to be sold, the SBA suggests a valuation first, by income, market or assets, and an attorney's review of the sales agreement. It also notes that transferring a family business may have legal impacts, such as estate and gift tax obligations, which is where the CPA or tax preparer earns their keep.
If it's to be closed, the IRS lists the steps: file a final return with the final-return box checked, pay employees their final wages and file the last employment tax forms, send the W-2s, report payments to contractors, pay what's owed, then cancel the Employer Identification Number by letter. The IRS won't close the account until every return is filed and every tax paid, and it says to keep employment tax records at least four years. The SBA adds the state side: file dissolution papers with every state the business is registered in, since failing to dissolve an LLC or corporation exposes it to continued taxes, and cancel the licenses, permits and trade name.
What to write down now
- The entity: sole proprietorship, partnership, LLC or corporation, and your percentage
- Where the operating, partnership or buy-sell agreement is, and what it says happens to your share
- Your co-owners, your attorney and your CPA or tax preparer, with phone numbers
- The business's bank, its Employer Identification Number and where the books are kept
- What you'd want: kept in the family, sold, or closed
