When someone died owning part of a business

First: which kind of business was it?

Everything on this page turns on one question, and it is the question a grieving family is least likely to have an answer to. "He owned half the business with Ray" describes at least four different legal situations, and they do not resemble each other.

• A limited liability company (LLC). Death dissociates the member. The estate is left holding the right to receive distributions — no vote, no management, no general right to the books — and nobody is obliged to buy it out.
• A partnership. Death dissociates the partner too, but the consequence is the opposite: if the partnership carries on, it must purchase the estate's interest, at a price floored by the value of the business as a going concern.
• A corporation. The shares are ordinary estate property and pass under the will or by intestacy. What can complicate that is a shareholders' agreement restricting transfer — and such a restriction does not always bind the estate.
• A sole proprietorship. There was never a separate entity. The assets are the deceased's assets and pass through the estate like the car and the house; the trading name, the licenses and the contracts generally do not survive the owner.

The difference between the first two is money, and it is often a lot of money. An LLC interest in a small business can be effectively unsellable. A partnership interest in the same business carries an enforceable claim for its value. Find out which one it was before you accept anybody's account of what you are entitled to.

Where to look: the formation documents filed with the state's corporation commission or division of corporations, which are public; the tax return, because a partnership files Form 1065 and an LLC may file as almost anything; and the accountant, who will know in one phone call. If there is no filed entity at all, it was a sole proprietorship.

If it was an LLC: what passes to the estate

When a member of a limited liability company dies, two things happen in sequence, and almost every misunderstanding comes from missing the second one.

1. The person stops being a member. Death is one of the events that dissociates a member, automatically, without anything the estate or the surviving owners have to do.
2. What the estate holds afterwards is a transferable interest — the right to receive the distributions the deceased would have received. It is not membership. It does not carry a vote, a management role, or a general right to see the company's records.

This surprises families months in, after they have already been behaving as owners — asking to see accounts, expecting a say in decisions, assuming a sale can be forced. Understanding it early changes what you ask for and who you ask.

It is not a drafting accident. The rule exists to stop a closely held business acquiring a co-owner it never agreed to — which is the same protection the deceased would have relied on when someone else's family inherited. It is defensible in the abstract and hard to receive in the particular.

If it was a partnership: they have to buy you out

A partnership starts the same way as an LLC — death dissociates the partner automatically, and the estate does not inherit the seat. Then it diverges completely, and in the family's favor.

In all three states Sahvelo can quote, if the partnership carries on rather than winding up, the statute obliges it to purchase the dissociated partner's interest. This is not a right the family has to negotiate for and not something the partnership agreement created. It is the default, and it is the single most valuable thing on this page.

1. The price has a floor. It is what would have been distributable if the partnership's assets had been sold, on the date of death, at the greater of liquidation value and the value of the whole business sold as a going concern. A surviving partner offering the estate its share of the furniture is not offering the statutory price.
2. Interest runs from the date of dissociation to the date of payment. Delay is not free for the partnership.
3. The estate is indemnified against the partnership's liabilities in California and Florida — including liabilities incurred after the death. The family is buying out, not buying in.
4. There is a clock, and the family has to start it. If no purchase agreement is reached within 120 days after a written demand for payment, the partnership must pay the estate its own estimate of the buyout price, in cash. Nothing obliges the surviving partners to tell a widow that a written demand is what unlocks this.^{Source 13}

Make the written demand, date it, and keep proof of delivery. Until it exists there is no deadline running against anybody, and a partnership with no deadline can negotiate for years.

Two cautions. The obligation applies where the partnership continues; if it dissolves and winds up instead, the estate takes its share of the winding up rather than a buyout price, and California puts that switch on an explicit ninety-day rule. And the partnership agreement, like an operating agreement, can vary the default — so it is still the first document to find.

If it was a corporation: the shares, and the agreement in the drawer

Shares are ordinary property. They pass under the will or by intestacy like anything else the deceased owned, and the estate becomes the shareholder. In a public company that is the end of the story. In a family company it usually is not, because somewhere there is an agreement saying what happens to a dead shareholder's stock.

Arizona, California and Florida all permit those restrictions and all limit them the same way, which is why this page states the rule once rather than three times: a restriction on transferring shares is enforceable against a holder or a transferee only if it was noted conspicuously on the certificate — and if it was not noted, it does not bind a person who did not know about it.

This matters more than it sounds. Families are routinely told that a shareholders' agreement signed years ago compels them to sell at a formula price nobody can explain. If that restriction was never noted on the certificate, and the estate had no knowledge of it, whether it binds the estate is a live question rather than a settled one.

So ask for two things in writing: the share certificate itself, both sides, and every agreement said to restrict it. Then look at whether the certificate carries the notice. Where the restriction is properly noted it will usually be a right of first refusal — an obligation to offer the shares to the company or the other shareholders before anyone else — which the statutes expressly permit.

Arizona and Florida both allow the notice to sit in the information statement a corporation without certificates must give its shareholders instead. A company that never issued paper certificates has not escaped the requirement; the notice has to be somewhere the shareholder was given it.

New York applies the same rule and adds two limbs of its own: an uncertificated security binds a transferee only if the registered owner was notified of the restriction, and a restriction on a cooperative interest binds if it is set forth in the cooperative record. That third limb is why an inherited New York co-op apartment is a securities question as much as a housing one — the board-approval restriction is effective against the estate whether or not anyone was shown a certificate.^{Source 32}

If there was no entity at all

A sole proprietorship is a person who trades. There is nothing to inherit a share of: the van, the tools, the stock, the receivables and the goodwill are the deceased's assets, and they pass through the estate like the rest of the estate. There are no other owners to negotiate with, which makes this the simplest structure and the loneliest one.

What does not pass is the business as a going concern in any automatic sense. Trade licenses are generally personal to the holder. Contracts may or may not survive the death of the person who was to perform them. The trading name may be registered to a person who no longer exists. Each of those has to be dealt with individually, and quickly if the business is still serving customers.

If the estate keeps the business trading, the IRS treats it as a new taxpayer: an estate operating a sole proprietorship after the owner's death must obtain a new employer identification number for that business. The deceased's number does not carry over and neither does the estate's own. This is missed constantly, and it surfaces months later when a payroll filing is rejected.

Can the executor keep it running?

Yes, for a while, and then only with the court's permission. This is the question executors act on before they think to ask it — the doors open on Monday because they always have — and every state puts a clock on it.

The power covers an unincorporated business or venture the deceased was engaged in: a sole proprietorship, in practice. Arizona and Florida allow four months from the date of appointment without any court involvement, if continuing is a reasonable means of preserving the value of the business including its goodwill. California allows six months from the issue of letters. After that, all three require a court order, and Arizona alone offers a third route — incorporate the business and hold it through the whole administration, provided no competent adult who stands to inherit it objects.

Running a business with employees exposes the executor personally. Income, Social Security and Medicare taxes withheld from an employee's pay are not the business's money — they are held in trust for the government — and a person who fails to withhold or deposit them faces the Trust Fund Recovery Penalty. That reaches a responsible individual, not just the entity. An executor keeping a short-of-cash business alive should pay the payroll taxes before almost anything else.

Two more things worth knowing before deciding. California's power expressly does not extend to a business operated by a partnership the deceased was a partner in — that business is not the estate's to run, and the buyout provisions are what apply instead. And in California any interested person, not only the personal representative, can petition the court to order the business shut down, which is the beneficiary's remedy when they think the estate is being drained to keep a business alive.

None of this decides whether the business should keep trading. It sets the boundary an executor operates inside. The judgment — whether the value being preserved is real, whether the estate can absorb a bad month, whether a sale now beats a sale in a year — is a business judgment, and the personal representative is answerable for it to the beneficiaries.

Closing it down: the filings that finish a business

A business that has stopped trading is not finished. It is finished when its final returns are filed and marked as final, and the marking is the part families miss — an unticked box is how a closed business goes on generating notices for years.

• The final income tax return, which depends on the structure. A sole proprietor's Schedule C goes on the individual return for the year the business closed — after a death, the deceased's own final return. A partnership files Form 1065 with the "final return" box ticked and the "final K-1" box ticked on each Schedule K-1. A corporation files Form 966 where a resolution or plan to dissolve or liquidate was adopted, plus a final income tax return with the "final return" box ticked.
• The final payroll return, if anyone was employed. The Form 941 or 944 for the quarter the last wages were paid, with the box ticked to tell the IRS the business has closed, the date the final wages were paid entered on the return, and a statement attached naming the person who will keep the payroll records and the address where they will be kept. The Form 940 for the year needs its own box ticked to show it is final.
• The employees' W-2s, due earlier than anyone expects: by the due date of the final Form 941 or 944, not the following January. Copy A goes to the Social Security Administration with a Form W-3. The employees have lost their jobs and need those forms to file their own returns.
• The records, kept afterwards. Employment tax records are to be kept for at least four years. Property records run until the period of limitations expires for the year the property was disposed of. This is the obligation behind the statement the final payroll return has to carry.

State filings sit alongside all of this and Sahvelo has not yet captured them: the state corporation or partnership dissolution filing, the state employment and unemployment tax accounts, sales tax registration, and local licenses. Each state agency closes its own account and none of them learns about the death from another.

What the estate can still do

Holding an economic interest is not nothing, and there are steps worth taking in the first weeks rather than the first year.

1. Find the operating agreement. Everything on this page is a default rule that the operating agreement is allowed to change. It may give the estate full membership, or require the company to buy the interest at a formula price, or forbid transfer entirely. It is the single most important document and it is usually not with the will.
2. Look for a buy-sell agreement and any life insurance behind it. Closely held businesses often fund a purchase obligation with insurance on each owner's life. Where that exists, the family's position is transformed: an unsellable minority interest becomes a funded claim for cash.
3. Notify the company in writing that the interest has passed to the estate, and keep proof. In Florida the company need not give effect to a transferee's rights until it knows or has notice — so silence costs the estate.
4. Get the interest valued as at the date of death. It matters for the estate's tax position and it is the number every later negotiation starts from. Valuing a minority interest in a private company is specialist work and the discount for lack of control and marketability is real.
5. Ask what distributions were made in the last few years, and on what basis. A transferee's right to information is narrow, but the right to receive distributions carries with it a reasonable basis for asking about them.

An executor who is also a beneficiary should be careful here. Negotiating with surviving owners on behalf of an estate you personally benefit from is exactly the situation where documenting each step protects you later.

What this page still does not answer

Sahvelo states what it has read at the source and says so plainly where it has not. The gaps in this page are these.

• Limited partnerships, LLPs and professional entities. The rules quoted here are for general partnerships; a limited partnership, a limited liability partnership or a professional corporation may be governed by a different act, and a professional practice usually restricts who may own it at all.
• State-level business filings and tax accounts. Dissolving the entity with the state, closing state payroll and unemployment accounts, sales tax, and license transfers all vary by state and by industry, and none is covered here.
• Valuing the interest. A date-of-death valuation of a closely held business is specialist work, and the discounts for lack of control and lack of marketability are contested even between honest professionals.
• Whether the business should carry on. That is a judgment about a specific business and Sahvelo does not pretend to make it.