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You Need a Plan for Divorce, Disability or Death

By Lane V. Erickson, Idaho Business Lawyer

The Idaho Secretary of State’s office compiled statistics related to new businesses that are started in Idaho. These statistics list the types of businesses that are started based on the type of entity that the businesses’ owners chose to create. These statistics can be found at the following link.

If you click on this link you will see that these statistics go year by year and set forth the exact numbers of businesses that were started and what type of entity these businesses included. As of the creation of this article, the most recent statistics are for the year 2015. Based on the information on this website, it appears that 25,468 new businesses began in Idaho in the year 2015. Of this number nearly half, or 12,395 were LLCs. There were also 7,600 assumed business names (sole proprietorships), 3,669 corporations, and 230 partnerships. The remaining numbers are associated with foreign corporations, LLCs and non-profits.

For more than 70 years the premier Idaho business attorneys at the Racine law office have worked with clients in the creation of numerous businesses including LLCs, assumed business names, corporations and partnerships. We have guided numerous clients through the process of protecting a business in all kinds of circumstances. Our team of attorneys includes partners Lane Erickson and TJ Budge, and attorneys Nate Palmer and Dave Bagley. Our attorneys are each skilled, knowledgeable, and experienced in assisting clients with all of their business.

The purpose of this article is to talk about the plan that you need for your business in case there is a divorce, disability or death of one of the business owners. To help you think about this, below is a short description of what can be done to protect your business when any of these things happen to an owner.

Protecting the Business Against a Divorce

According to national statistics, more than half of all marriages end in divorce. While this is not only a sad commentary on the ability of citizens of the United States to stay married, it should also be an alarm that should go off anytime a person creates a new business that has more than one owner in it. The reason for this is because if a person is an owner of a business, and they then get divorced, their divorced spouse may have a right to a portion of the ownership interest in that business through the divorce. This is especially true in community property states such as Idaho. Because of this, it is vitally important that the business have written and well-thought-out business documents in place.

When it comes to an LLC, the written document that is vital is called an operating agreement. This agreement acts as a contract between all the owners in the business. This document would be specific about the percentage of ownership each owner has. Additionally, this document can contain limitations on the ability of an individual who obtains an ownership interest through divorce to be able to manage, control, or operate the business. In other words, the operating agreement can be written in such a way that while a person may obtain an ownership interest through divorce, they may not have any ability to vote, or manage, or control the business.

The document associated with a corporation is the bylaws. This document is very similar to an operating agreement in that it sets out the specific operational guidelines and restrictions associated with the corporation. Again, this would include the ability of an individual who obtains an ownership interest in the corporation through divorce to be able to wield that ownership interest in a way that influences the continued operation of the business.

The most important thing that these documents can do is provide both the other owners, and/or the corporation itself, with an opportunity to buy the interest that would otherwise go to an individual through divorce. In other words, the divorced individual would not actually receive an ownership interest in the business, but rather would be paid the fair market value of that ownership interest so that the ownership interest stays with the current owners or the corporation itself. This usually works well because most divorced individuals are more interested in money rather than having an ownership interest in an LLC or corporation they cannot participate in or control.

Protecting the Business Against a Disability

The next thing that we should discuss is the disability of an owner of a business and how this could affect the ongoing operations of the business. The same corporate documents that are listed above could also be used to deal with a circumstance where an individual owner of the business is disabled. In this instance, the operation of the business could be affected negatively if the person who becomes disabled was actively involved in making decisions or managing or operating the business entity.

Usually we suggest that when a disability occurs, the corporation and/or the other owners of the business be given an opportunity to purchase the ownership interest from the individual who is disabled. The corporate documents listed above can provide specific instructions and processes about what occurs when a disability happens to an owner of the business. The only real restriction usually is that the purchase price include the fair market value of the owner’s ownership interest in the business. In other words, he needs to be paid a fair price to be bought out.

Protecting the Business Against a Death

The death of an owner of the business is the next bad thing that can happen that the corporate documents can protect against. When a person dies, their ownership interest in the business is an asset or is considered property that belong to that individual. As a result of that, that individual can pass that property through a written last will and testament. In other words, an owner of the business can give their ownership interest through their last will and testament to a spouse, to children, to other family members or friends, or even to a charity. This can create obvious problems for the owners who are still alive and still trying to operate the business.

When a business is started, everyone is happy and usually excited about the business. Because of this, no one really thinks about what could happen that may place them in business with an owner they never thought about being in business with before. When a person dies, they could pass their ownership interest on to their spouse, their children, or any of the other groups listed above. Without some protections in the corporate documents this simply means that these new people step into the shoes of the person who died and get to hold and exercise the ownership interest including management, voting, and so forth. It’s for this reason that we usually assist our clients who are starting a new business with creating the operating agreement or bylaws or other corporate documents so that the right to purchase that ownership interest after an owner dies exists for the remaining owners or for the corporation.

Let’s face it, divorce, disability and death are realities in life. They happened to all or most people. As a business owner, a person needs to be aware of these things so that they can understand how to plan for them in a way that protects their business. We have assisted numerous business owners and making plans that will protect their business from these things. We are confident that we can help you too.

Enlist an Idaho Business Attorney to Help You

Our team of Idaho lawyers can help you with any of your business structure or operation needs. Whether you are seeking to create a new business or review a current business, we are available to discuss your options and answer your questions at an initial consultation. Call us toll free at 877.232.6101 or 208.232.6101 for a consultation. You can also email us directly at lane@racineolson.com or stop by our office at 201 East Center Street, Pocatello, Idaho 83201. We will answer your questions and help you solve your Idaho business problems.

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