What If Your Business Partner Dies?

Death isn't a subject on which many people want to dwell, but when it comes to business, you must decide what happens if your business partner dies. Preparing for the death of a business partner ensures you will be able to keep the business alive afterward and that everyone's interest in the business is protected. You must not only think of yourselves and your business, but also the lives of those you leave behind. Even after a business partner dies, his or her estate still owns part of the business, which must be sold to the remaining partners.

Most business owners have exercised enough forethought to create agreements for the eventuality of death. Buy-sell agreements and cross-purchase agreements are the two most popular types of contracts that deal with the death of a business partner. In order for those agreements to hold up in court, however, there must be funds to back them up. When a business partner dies, his or her share in the company is sold back to the remaining partners, but those partners must have the money to make the actual purchase.

In buy-sell agreements and cross-purchase agreements, life insurance policies are purchased in order to cover the cost of the business partner's share. In a buy-sell agreement, each of the business partners purchase life insurance policies on each other. When one business partner dies, the funds from the insurance policies are used to buy his or her share of the business. In a cross-purchase agreement, the same rules apply, but the life insurance policies are purchased by each of the stockholders.

Unfortunately, preparing for the death of a business partner is an ongoing task that must be revisited at least once a year. The value of the business will either increase or decrease over time, which means that each business partner's interest in the business will likewise fluctuate. When the value of the business increases, each partner must determine if there is enough money in the life insurance policies to cover those additional costs. Should one of the partners die, the remaining partners will have to come up with a way to purchase his or her interest in the company.