If your company has multiple key shareholders and one of them dies, what happens? We’ll discuss the potential outcomes, as well as how to plan for this unfortunate scenario, today.
If you own a company with multiple stockholders, what happens when one of the key stockholders dies?
Ideally, you should be prepared for this scenario before it occurs, and today we’ll share a few of the most important preliminary steps.
The first step is to assess the value of your company and the stock you own in it. This will help you understand the kind of liability you’ll face if you have to buy out the family of a shareholder who has died.
The next step is to consider what the terms of this buyout might look like. Will you buy the family out over time or give them a lump sum? Can you even afford these options? Taking a deep dive into your finances now can save you a major headache later on.
Once you’ve assessed the value of your company and thought about what the terms of a buyout would look like, you can then draft a buy/sell agreement. This agreement is one that all shareholders will review and, hopefully, consent to. It will outline exactly what will happen in the event that a key shareholder dies or becomes otherwise incapacitated.
“This process might sound relatively straightforward, but you would be surprised to learn just how many corporations haven’t planned for such an event. “
Finally, you’ll need to sort out your plan for funding the buyout. One of the least expensive ways to ensure you have the capital to buy out a stockholder in the event of a catastrophe is to insure that stockholder. There are many ways this insurance can be arranged. Sometimes, it’s a matter of one shareholder insuring another. Other times, it’s the corporation itself that insures the shareholder.
The money sent by the corporation to the insurance company would, upon the death of a key shareholder, be sent back to the corporation. The corporation would then send this money (either in installments or as a lump sum) to the family of the shareholder. The deceased shareholder’s stock would then be re-transferred to the company to be disbursed among the surviving stockholder(s).
This process might sound relatively straightforward, but you would be surprised to learn just how many corporations haven’t planned for such an event. And without a plan like the one we’ve described, the decedent’s family could inadvertently become key shareholders in your corporation. Obviously, this is the last thing you want. This is exactly why preemptive planning is so important.
If you have any other questions or would like our help putting together this kind of plan for your business, feel free to give us a call or send us an email. We look forward to hearing from you soon.