Every founder and owner has a plan for what happens if an employee doesn’t show up for work. Some have plans for what happens if an employee dies. Almost none have a plan for losing themselves.
It’s understandable but not excusable. When you are the one selling the work, approving payments, managing employees and answering every question, there is always something more urgent than planning for the day you cannot do those things.
But if you were hospitalized tomorrow, who could access the company’s bank account? Who is going to make sure payroll is handled? Who can sign a contract, deal with a customer problem or keep the doors open? If the answer is “I’m not sure,” then your business has a continuity problem. An estate plan should solve it before your family, employees and customers are forced to solve it during a crisis.
Plan for incapacity, too
Business owners often think succession planning means deciding what happens after death. Death is only part of the problem. A mental breakdown, a stroke, accident or serious illness can leave the owner alive but unable to manage the business. A will does nothing during the owner’s lifetime. Your family may know exactly what you would want, but knowing your wishes is not the same as having the authority to do anything.
A durable financial power of attorney can help resolve incapacity issues. It gives the right person appropriate authority over business and financial matters. But it must also coordinate with the company’s operating agreement, banking arrangements and other governing documents. A complete continuity plan connects your legal documents with practical instructions for the people who may need to act.
Ownership is not the same as control
Suppose you own an LLC and leave your interest to your spouse or children. That does not necessarily mean they can immediately step into your shoes and operate the company.
Under Michigan law, an assignment of an LLC membership interest does not, by itself, give the recipient the right to participate in management. Management authority depends on Michigan law, the operating agreement and how the successor is admitted as a member. That means your family could inherit an economic interest in the business without having any authority to run it. That gap can create the exact situation an estate plan is supposed to prevent.
Where a trust can help
A properly designed trust can provide continuity because the successor trustee can act under the trust’s authority after the owner’s incapacity or death. If the business interest has actually been transferred to the trust, and the transfer complies with the operating agreement, the trustee may be able to manage the transition without first waiting for probate. The trustee’s authority to run the business also depends on the company’s governing documents and applicable law. The important phrase is “actually been transferred.” Signing a trust does not magically place an LLC, corporation or other business inside it. Ownership records, assignments, consents and governing documents must be reviewed and coordinated. A beautiful trust that owns nothing is an expensive stack of paper.
The four questions every owner should answer
- Who takes over if I am incapacitated? Name the person and define the authority. “My spouse will handle it” is not a legal plan.
- Can that person access the money? Authority on paper must work with the bank, accounting system, payroll provider and company records.
- Who receives the business when I die? Decide whether the business should continue, be sold, pass to family members or be purchased by another owner.
- Do all of the documents tell the same story? The trust, will, power of attorney, operating agreement, buy-sell agreement, beneficiary designations and ownership records should work together.
The real product is time
Good planning gives your family time to grieve, your employees time to adjust and the business time to survive. Bad planning forces everyone to make expensive decisions under pressure in an emotional state. You built the company by making decisions before problems became emergencies. Your succession plan deserves the same treatment.
If your family would inherit a business they cannot access, operate or sell, the planning is not finished.
This article provides general information about Michigan estate and business-continuity planning. It is not legal advice for any particular person or company.