If not, your business will probably come to an end when you do–not because it isn't viable, but because you failed to understand the unique nature of sole proprietorships.
In a sole proprietorship, the business and the business owner are considered to be the same legal entity. At the death of a sole proprietor, the business is almost always dissolved. Although the business owner's personal estate has the ability to sell assets or continue the business, it is rare that the company continues as a going business concern when an owner becomes deceased.
Planning and preparation are critical for a business to survive the death of its owner. But the time to begin planning is now. To better understand what you're facing, here are the most common ways of handling sole proprietorships after their owner's death.
- Liquidation. By far, liquidation is the least attractive option for owners and their heirs. The last thing any business owner wants to see is the company they have poured their lives into suddenly sold piece by piece on the auction block. Since the business and the business owner are legally identical, personal estate costs significantly reduce the value of the business, sometimes netting heirs pennies on the dollar.
- Early sale. A much better alternative is for the business owner to sell the company at a predetermined retirement age, or at least before he passes away. This provides for a thoughtful transition that directly involves the business owner rather than a mad scramble for options after he is gone.
- Sale to a family member. Although most business owners would prefer to have a family member take over the company after they are gone, family members are often not interested in getting involved. If arrangements haven't been made prior to the business owner's death, the estate can sell the business to a family member. However, family members who purchase companies in this manner should not expect special concessions, especially if there are other heirs.
- Sale to a key employee. Key employees make logical buyers after an owner's death. The family is already familiar with these employees, and these employees are already familiar with the company's day-to-day operations. Sometimes it may even be appropriate for the company to be purchased by a group of employees who are dedicated to ensuring its long-term survival.