Succession Planning in Family-Run Corporations: Legal Considerations

Nobody wants to consider the worst-case scenario.

It’s simply unpleasant to think about what’s going to happen when we die, or when our family members die. That’s why many people avoid it– it’s really not fun to have to confront the realities of life and death.

Unfortunately, for certain legal matters, considering the worst-case scenario is often necessary. This holds true for writing a will– if you don’t want to think about it and avoid doing it, the division of your property and assets amongst your family is often contentious and confusing.

This is also true for family-run corporations.

What happens if the owner of a family-run corporation passes away?

The events that occur after the owner of a family-run corporation passes away greatly depend on the kind of preparations that the owner made beforehand.

If they neglected to come up with a succession plan, the company’s assets and finances might enter a contentious battle between the remaining family members. This could even result in the dissolution of the company and serious interpersonal problems within the family.

What is a succession plan?

A succession plan is simply a plan that determines exactly what will happen in the event of various scenarios that a family-run corporation might experience.

A succession plan isn’t just for the owner’s death. It might also be used in the event of disability or retirement. A very well-prepared succession plan also accounts for situations like divorce or bankruptcy.

Essentially, a succession plan considers the company’s personnel and goals, and determines a course of action to be carried out in case of various events or situations that might arise.

These plans might identify things like when certain family members should work in the family business, in addition to what compensation they’ll receive.

How can I put together a good succession plan?

In order for a business to remain profitable and operational in case the owner passes away or another event occurs that prevents the owner from fulfilling their duties, a plan must be put in place.

The owner should determine who to pass the business on to– for example, siblings or children.

A succession plan is an important and legally binding document– not just an informal list. Therefore, the business owner should work with an attorney with knowledge and experience in the matter to build a solid succession plan. 

The plan should also include information about whether family members can serve on the board of the company, or who will take responsibility for any debt that the company has accrued.

What happens if you don’t make a succession plan for a family-run corporation?

If a business owner suddenly passes away and hasn’t prepared a succession plan, their heirs might find out that any debts that the business holds are due immediately. Alternately, if a plan has been put in place, the lines of credit can be passed on to the next member of the family.

Without a solid succession plan, a company runs the risk of liquidation or bankruptcy. If no new CEO has been appointed and all of the company’s finances were in the name of the deceased owner, it’s very difficult to remedy any financial difficulties and keep the business profitable while figuring out the next steps.

Who can I work with to build a succession plan?

It’s essential to work with an attorney, since a succession plan is a legal document. At Davidson Law Firm, we’ve been working to protect our clients for forty years– which means that we have the knowledge and experience required to keep your business running smoothly, no matter what happens.

Don’t put it off– give us a call today to get your succession plan ready to go.