Disclaimer: Consumer legal fundings and advances are not loans under applicable financing laws. Rockpoint’s products are non-recourse, meaning if you don’t win your case, you don’t have to pay us back. Receiving financial support in connection with a legal case is typically (and oftentimes incorrectly) referred to as a “lawsuit loan” or “loan.” Therefore, for the ease of search references, these terms may be used in this context to refer to our funding products, but we maintain our separateness from consumer loan products in all legal aspects.
If you’re the estate executor for a loved one who recently passed, you may have a lot of questions about what happens next. When the decedent owned a business, the probate process can become more complicated. What happens to a corporation when the owner dies? And how should you proceed?
The answer depends on the type of corporation, the decedent’s estate plan, and several other factors. (If you’re seeking state-specific information, check out our Tennessee probate guide or the guide for your state.)
Do Corporations Die When the Owner Dies?
Some types of businesses, such as sole proprietorships, effectively “die” when the owner dies. A sole proprietorship ceases to operate upon the owner’s death, and the business assets transfer to the owner’s beneficiaries, according to the will.
However, the same is not true for corporations. Instead, these businesses transfer to the estate. Then, the beneficiaries determine what happens next, whether that means bringing in a new director, dissolving the business and distributing shares, or co-owning the business.
Types of Corporations and How They Transfer Ownership After the Owner Dies
When answering “What happens to a corporation when the owner dies?” it’s important to understand the type of corporation your loved one owned. The two main types relevant to this discussion are:
- S corporations, which pass corporate income, deductions, losses, and credits through their shareholders for tax purposes
- Limited liability corporations (LLCs), which are a business structure with pass-through taxation and limited liability protection
If you’re unsure what type of corporation your loved one owned, look for the paperwork registering their business. You can also research this on the Secretary of State website, which has a business entity database.
When the owner of an S corporation dies, the estate becomes the new owner. The estate beneficiaries then inherit the business per the decedent’s will or the probate process.
Meanwhile, when the owner of an LLC dies, a pre-established operating agreement determines what happens next. This agreement may do any of the following:
- Permit the surviving owners to buy out the heirs’ shares of the business
- Add the heirs as owners in financial authority alone
- Add the heirs as owners in financial and managerial authority
If the LLC had no other surviving owners, the operating agreement will determine whether it lives on or ceases to exist after the owner’s death.
Frequently Asked Questions About Corporation Transfers After an Owner’s Death
The exact process that occurs when an owner of a corporation dies can vary significantly. These questions and answers can help you navigate the process after your loved one’s death.
What If There Was No Will?
If your loved one did not have a personal or corporate will indicating what happens to a corporation when the owner dies, the court will appoint an executor of the estate. Until now, no one would have the authority to oversee the decedent’s interests, and the corporation would hang in limbo.
What Happens to the Decedent’s Shares of the Business?
If your loved one was one of several shareholders in the corporation, the transfer of shares can look different depending on the decedent’s wishes. One of three things will likely happen to the shares:
- Pass to the beneficiaries named in the will, and inheritance tax may apply
- Pass to the beneficiaries determined during probate if there was no will
- Transfer to the other shareholders or back into the corporation if an operating agreement indicates this shareholder succession process
Do The Beneficiaries Have To Keep the Business Alive?
No, beneficiaries do not have to keep a business alive after an owner’s death. They can collectively determine what to do with the business, whether that’s distributing the assets and shutting down the entire operation, transferring ownership to a partner, or selling the business.
Facilitating a Smooth Transition After a Corporation Owner Dies
You can take a few additional steps to ensure business continuity and facilitate a smoother transition. Your loved one’s business was likely a significant part of their life. Everyone involved will face a challenging transition after the owner’s death if the business had employees, shareholders, or both.
Along with determining what happens to a corporation when the owner dies, you can take any of the following measures to help this transition:
- Deliver the news to employees and shareholders in person. These individuals have a vested interest in the business, and learning that an owner has died can be difficult.
- Include information about the business in the obituary: Share about your loved one’s business in their obituary to celebrate the important role it played in their life.
- Honor the business legacy: Whatever you and any other beneficiaries decide to do with the business, try to follow your loved one’s wishes.
- Consider creating a foundation in the owner’s name: If you decide to dissolve the business, maybe set up a foundation or charitable fund with some of the assets to continue the business legacy.
Find Financial Relief During Probate With Rockpoint Probate Funding
Determining what happens to a corporation when the owner dies is just one element of your executor responsibilities. If you are navigating probate after a loved one’s death, you’re likely facing steep expenses. Maybe you need funds to help the business survive, or perhaps you simply need to cover funeral costs and medical bills.
Rockpoint Probate Funding offers fast, reliable cash advances on inheritances. We can help bridge your financial gap as you wait to receive your inheritance or life insurance payout.
Apply now to learn whether you qualify for probate funding and start the process.
