Steps to Protect Your Business from an Owner’s Incapacity

How to Protect Your Business from an Owner's Incapacity

If you own a business, ask yourself this question: What would happen to my business if I could no longer work? Fortunately, there are ways to protect a business from an owner’s potential incapacity. The best way is to develop plans before incapacity strikes.

Start at the Beginning

Legal documents usually are prepared when forming a business. The number and type of documents varies depending on the type of entity that is being established. For example, a corporation usually requires more formation documents than a sole proprietorship.

While going through the steps to set up a business, take time to address the possible incapacity of one or more owners.

  • Bylaws/Constitution/Operating Agreement.
    A business entity’s formation documents may contain provisions that address incapacity of any of the owners or partners.
  • Buy-Sell Agreements.
    This document may be prepared and signed when a company is created. However, a buy-sell agreement can be negotiated at any time during the life of a business. This agreement may be a standalone document or may be a provision in another document. Buy-sells give partners, shareholders, or the company itself the opportunity to buy out a disabled partner’s interests.
  • Insurance Policies.
    Sometimes companies will take out insurance policies on owners and partners. The payout from a life insurance policy may provide the funds needed to buy out a deceased partner’s interests. However, disability insurance may also be purchased to cover business operation costs if an owner or partner becomes incapacitated.

Other Options

Business owners could consider transferring their business interest to a revocable living trust. Acting as trustee, the owner retains control of the business. In the event the owner is no longer able to manage the business, due to either disability/incapacity or death, a successor trustee would take over.

While still healthy, the business owner could train family members or key employees to take over the company if necessary. This option, however, still needs a legal mechanism to work. A durable power of attorney could name an agent to take over business operations if the business owner is no longer able to do so.

Include Your Business in Your Estate Planning.

Business succession and incapacity planning are often handled through an individual’s estate plan. Consult with an experienced attorney to learn which strategies are viable options for your situation.

Attorney John Mangan is board certified in Wills, Trusts & Estates by the Florida Bar. Please call us at 772-324-9050 or use our Contact Form to set up an appointment. We help clients throughout Florida, including Stuart, Palm City, Hobe Sound, Jupiter, and Port St. Lucie.