What is Your Plan for Divorce, Disability or Death

By Lane V. Erickson, Pocatello Business Lawyer

According to the Idaho Secretary of State’s office thousands of new business are created in Idaho each year. The statistical reports show that in Idaho 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. These statistics can be found at this link.

Many of these new businesses were created in and around Pocatello. We know this personally because for more than 70 years our team of premier Pocatello 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.

This article was created to provide you with information you should consider when it comes to your own Pocatello business. In other words, we want to help you consider what you may need to do to protect your business in the event one of the owners of the business becomes divorces, disabled or dies. Each of these events could have an enormous effect on the continuing operation of your business. To help you think about these things specifically, below is a short description of you can do to protect your business when any of these things happen to an owner.

Most people have at one time or another heard the statistic that more than half of all marriages in the United States end in divorce. The same percentage exists in Idaho. Because of this alarming statistic, every business owner should think about how the divorce of an owner of the business could affect the operation of the business. The reason for this is because if a business has more than one owner, there is a good chance that one of the owners will become divorced during the operation of the business. Depending on the circumstances of the divorce, the spouse of the business owner may have a right to a portion of the ownership interest in the business through the divorce. In other words, your partner’s spouse may end up owning a part of the business through the divorce. This is especially true in community property locations such as Pocatello. As a result, having written and well-thought-out business documents in place is hugely important. This cannot be overstated.  

Consider a business that operates as an LLC. The controlling corporate document in an LLC is called an operating agreement. The operating agreement is a legal contract between all the owners in the business that controls the percentage of ownership each owner has. In addition to this, the operating agreement can also have specific written limitations for a person who attains an ownership interest through divorce. These limitations could include that person’s ability to vote, or manage, or control decisions about how to operate the business. In other words, the operating agreement can turn a person who obtains an ownership interest in the LLC into nothing more than a passive owner. Without these specific restrictions listed in the operating agreement, a person who gains ownership through divorce would have the same rights to vote, manage and control the operations of the business.

A regular corporation is also controlled by its corporate documents. Specifically, bylaws control the ownership, management and control of a corporation. Bylaws operate in a manner similar to an operating agreement and can provide limitations or restrictions on the ability of an individual who attains an ownership interest through divorce to be able to influence the continued operation of the business.

As you can see, corporate documents are vitally important because they provide the framework of control for running the business. These documents define who the owners are. They also can control what happens to ownership interests in the event of a divorce such as allowing the other owners, or the corporation itself to buy the interest that would otherwise go to an individual through divorce. Through this type of plan the divorced individual never gets any ownership but is simply bought out. This allows the ownership interests of the business to stay with the current owners or with the corporation itself so no outsiders can gain any ownership or control. In most instances this works well because most people who are divorced would rather have the money than an ownership interest in an LLC or corporation they cannot control.

Disability is a situation similar to divorce. If an owner of the business becomes disabled, he may have provided powers of attorney documents that would give an outsider the ability to utilize and control the disabled owner’s interest in the business. To limit this, the same corporate documents listed above are often used to allow the actual owners to keep control of the business.

In most circumstances when a disability occurs and their appears to be no recover for the disabled owner we suggest that the other owners of the business or the corporation purchase the ownership interest from the person who is disabled. The same corporate documents listed above (operating agreement of bylaws) can provide specific instructions and procedures to control what happens when an owner becomes disabled. Usually the only issue is what is the amount that will be paid.

The next bad thing that can happen that could have an impact on the ownership and operation of a business is the death of an owner. A person’ ownership interest in a business is treated as an asset or property. When a person dies, this property could be controlled by the deceased owner’s written last will and testament. Through a will an owner of the business can give their ownership interest to a spouse, or to their children, or event to other family members or friends. Again, for obvious reasons, this could create serious problems for the surviving owners.

When a business is started, everyone should think past the excitement and focus on creating a plan that will protect everyone involved if anything bad happens. This is where utilizing an experienced attorney is so important. A good attorney will help you think about what could happen. You can then create a business plan through the corporate documents that will protect against death, disability, divorce of any other thing that could harm the operation of the business in the future.

The reality is, divorce, disability and death happen in life. In fact, any of these things could happen to anyone. 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.

Our team of Pocatello 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, Pocatello 83201. We will answer your questions and help you solve your Pocatello business problems.