Planning for a Transition in Your Florida Business
Business transition planning is preparing for the handover by sale, but-out, or take-over following the demise of the owner. This is accomplished through corporate governance documents like an operating agreement or partnership agreement.
What is a business transition
A business transition can be defined as any change in the ownership or management of a business. This can occur when the stock of business is bought out. This commonly occurs when the buyer wants to obtain licenses held by the business as opposed to obtaining their own licenses or permits. This transition can also occur upon the retirement or demise of the owner or owners.
With multiple owners the surviving owners may inherit the ownership but this is not a foregone conclusion. Without proper documentation addressing this situation the survivors of the owner such as a spouse, children, parent, or other beneficiaries may inherit the ownership through operation of a Will of by law if there is no Will. Having family members or other beneficiaries suddenly become part owners may not be intended or preferred thus addressing this possibility should be pf paramount importance to the owners and can easily be accommodated in the corporate governance documents.
There is an applicable famous saying that the failure to plan is a plan to fail. Particularly when a business owner dies without any documents to address the transition of the business that saying appropriately addresses what happens. In such case like passing without a Will, the business owner can leave a disaster for those who survive.
An easy solution is to have an experienced business lawyer prepare a simple document to allow a surviving spouse, employee, or other beneficiary to instantly take over and run or wind up the business. This allows the survivor to take advantage of the value of the business at the time of the owner’s death for the benefit of whom ever the owner desire like family or charity.
Corporate governance documents are the key to business transition planning
The limited liability company is the most common business entity used today in Florida. For the LLC the document that achieves an efficient business transition and alleviates problems caused by the death or incapacity of the company’s owner is an operating agreement. This is sometimes referred to in common parlance as a partnership agreement but the LLC is technically not a legal partnership so the proper term is an operating agreement.
Even if the LLC has only one member or owner, the operating agreement can act like a Will for the business. My article titled Do I need an operating agreement for my Florida LLC on LLC operating agreements is a quick read and contains helpful information about Florida operating agreements.
Corporations are governed by their bylaws and shareholder agreement. For the Inc. those should contain continuity provisions specifying who will take over in the event of the demise of the owner.
In Florida, the LLC has eclipsed the Inc. as the preferred business entity because only one governing document is needed as opposed to two. Also, the protections afforded to owners between the two are the same but the management and documentation requirements are less for the LLC. My article entitled Which is better the Inc. or the LLC discusses the differences between these two types of entities in more detail.
What else can you do to prepare for a business transition
In addition to having properly drafted corporate governance documents like an operating agreement prepared by your corporate lawyer, a prudent measure is to also develop a transition plan.
The operating agreement will say who takes over but the internal transition plan will serve to tell that person what to actually do. This transition plan is similar to what you would prepare for any disaster response. But this transition plan must be balanced against the needs of the business to protect its proprietary information.
To put it in other terms, the operating agreement is like telling everyone concerned that person X gets everything in your safe. The transition plan would tell person X how to open the safe.
What should be in a business transition plan
A business normally has clients, vendors, and may have employees or independent contractors. The client and vendor information may be confidential or even a trade secret. The business may have other trade secret information, trademarks, and a virtual presence like social media and e-commerce accounts.
The owner or owners may not regularly share all of that information with employees and contractors. The employees and contractors may also be subject to confidentiality, non-compete, and/or non-solicitation agreements. Therefore the business owner or owners can prepare that information but need not share it with anyone until a triggering event occurs.
As long as the person tasked to take over the business or another trusted person other than the business owner knows of the existence of the business transition document then when the triggering event occurs the document can be easily retrieved and activated. The business transition plan can be paper or digital. The location of the business transition plan can also be defined in the operating agreement or other writing. Ideally it would contain information about the operations of the business and how to contact important parties like vendors and clients.
The transition plan should also include passwords and log-in information for all business online accounts or the location of those so the party tasked with taking over the business to run it or wind it up can more easily do so. Whether to continue to operate the business, to sell it, or to wind it up may be up to the person into whose hands the business owner placed the business in the operating agreement. Depending on the circumstances that decision could be made by that person alone or together with others.
How do business transition plans affect single member and multi-member LLCs
If the LLC has multiple members it is a multi-member LLC. In that case the operating agreement will normally contain a provision for the disposition of the deceased or retired member's shares. For example in those cases the shares may automatically revert to the company upon the death of a member imposing a purchase obligation on the business to pay the named beneficiary or beneficiaries under an agreed formula over a specified period of time.
The surviving member or members may already know how to fully operate the business. But where the deceased or retired member had some specific knowledge of certain operations in the business, a transition plan will ensure the continuity of the business. Cross training between members will also promote the success of the business they worked hard to build.
When the company has only one member it is a single member LLC. In that instance the operating agreement and transition plan become even more important to allow for a smooth transition. The plan can even be useful where the owner does not die but just decides to sell. That transition plan can add to or take the place of a post-sale management agreement where the owner stays on to show the buyer how to run the business. When used in this manner, the transition plan can add great value to the purchase price akin to selling the business with a user manual.
As to what every business owner needs to know before selling their business my article on that topic is accessible by clicking the highlighted text.
What is a business wind up
As mentioned above the person identified in the business transition plan and operating agreement tasked to take over the business must often decide whether to sell it, run it, or close it. The closure of the business it called the wind up.
When a business decides to close or is forced to close it undergoes this wind up process. The corporate governance documents like the bylaws and shareholder agreement for a corporation and the operating agreement for a limited liability company normally address this wind up process. Corporations that have no corporate governing documents are regulated in this regard by Chapter 607 of Florida’s Statutes. The wind up of a limited liability company without an operating agreement is handled by Chapter 605. Those statutes instruct business owners how to properly wind up their business so that the owner or owners are not exposed to liability from the business after it closes.
The basic concept for the wind up of both the Inc. and the LLC is to amass the assets, provide notice to creditors, and pay them before insiders. If a business owner simply takes all the money or assets to the detriment of the creditors and closes the business, the owner can expose him or herself to the claims of those creditors and may lose the protections that the business provided.
A business can cease to exist in one of three ways. First, it can be administratively dissolved if it fails to file its annual report. In that case without a proper wind up the owner or owners can still be exposed to liability. Secondly, it can be judicially dissolved if the governing document allows for that and the parties file a lawsuit. That lawsuit in common parlance is called a corporate divorce and takes the place of the wind up because it is done within the lawsuit. The third method of closing a business is a voluntary dissolution. In that situation the owner or partners meet and vote on articles of dissolution. The operating agreement may address how the wind up will occur and the votes needed for dissolution. It can also address what happens if some partners want to dissolve the business and others do not.
Conclusion on business transition planning and winding up
The business has a choice of not having any governing documents like an operating agreement or partnership agreement and of accepting what the Florida legislature has deemed appropriate under the applicable statutes. Or the business can take control of the situation with its own governing documents.
As an experienced and seasoned business litigator who has tried corporate divorces with and without operating agreements, bylaws, shareholder agreements, or partnership agreements in court I believe that it is always prudent for business owners to protect the assets they have worked hard to develop by having an operating agreement.
Sophisticated business owners will embrace the idea of a business transition plan and prepare for that possibility so their diligent efforts to build a successful business will benefit whomever they decide should take over that business if they are incapacitated or perish. An experienced and seasoned business litigator can help your business in preparing these and other important business documents.