What happens to your business if a partner dies?
Updated: 6 days ago
Whatever your operating agreement says. If it says nothing, you may end up in business with your partner's family.
The default outcome
In many states, a deceased member's interest passes to their estate. Depending on the agreement and state law, the heirs may receive economic rights without management rights — or they may receive both.
Either way, someone who never chose to be your partner now holds part of your company, and they may need money more than they need a business.
What a buy-sell provision does
Sets out in advance what happens: who buys the interest, at what price, and on what terms.
Usually triggered by death, disability, retirement, divorce, bankruptcy, or a voluntary exit.
Three questions it needs to answer:
Who buys? The company, the remaining members, or either.
At what price? A formula, an appraisal process, an agreed value updated annually. Something concrete, because "fair value" invites litigation.
With what money? This is the one people skip.
Funding is the part that fails
An agreement requiring surviving members to buy an interest for $400,000 is only useful if $400,000 exists. Common solutions are life insurance owned by the company or the members, or installment terms over several years.
Without a funding mechanism, the provision either goes unperformed or forces a sale of the business to satisfy it.
How it interacts with estate planning
If your operating agreement restricts transfers and your partner's estate plan directs the interest to a trust, those documents contradict each other. Whoever handles the estate plan needs to see the operating agreement.
What to do
Open your operating agreement and search for "death." If it isn't addressed, or is addressed without a price mechanism or funding, that's the gap.
Fix it now. Nobody will negotiate this fairly once one side is grieving. Document review and revision adds the provision and the price mechanism.
This is general information, not legal advice for your situation. If you want an answer for your business, book a consultation.
