A closely held business is usually the largest asset a Long Island family owns and the one least prepared for the owner’s absence. The documents that govern it were often signed years ago, filed away, and never reconciled with the will.
What you need to know
- Two separate questions have to be answered: who owns the business interest, and who has authority to run it. The will answers the first. It does not answer the second.
- The operating agreement or shareholders agreement controls what happens to an interest on death, disability or a forced exit. Where it is silent, state default rules apply and are rarely what the family wanted.
- A buy-sell agreement without funding is an unenforced promise. Life insurance, disability buyout coverage or a defined installment structure is what makes it work.
- Incapacity is the harder scenario. A power of attorney that does not clearly cover business authority, or an operating agreement that does not permit an agent to act, can leave a company unable to sign, pay or bank.
- Key-person risk extends beyond the owner. Losing the only person who holds a license, a bonding relationship or the vendor passwords can be equally disruptive.
- The business documents and the personal estate plan have to say the same thing. Conflicts between them are common and are usually discovered at the worst moment.
Ownership and authority are not the same thing
When an owner dies, the membership interest or shares pass under the will, the trust, or the operating agreement — depending on which controls. That answers ownership.
Authority is separate. In many single-member LLCs, the sole member is also the sole manager. On death, the interest passes to the estate, but nobody has authority to act for the company until an executor or administrator is appointed by the Surrogate’s Court, and even then the operating agreement may limit what a successor can do. Meanwhile payroll is due, and the bank will not accept instructions from a spouse who is not on the signature card.
Well-drafted operating agreements address this directly by naming a successor manager or permitting the personal representative to act on death or incapacity. Most do not, because they came from a template used to form the entity and were never revisited. Formation documents and governance documents deserve separate attention, as discussed on the business planning and succession page.
The test question. If the owner were unavailable starting tomorrow, who could legally sign a check, sign a contract, access the bank portal, and speak to the payroll company? If the answer is nobody, or “we would work it out,” the plan has a gap that no will can fill.
What the operating agreement should actually say
For a multi-owner business, the agreement is where transfer restrictions live. Common provisions worth reviewing:
- Transfer restrictions. Whether an interest can pass to a spouse or child at all, and whether the remaining owners have a right of first refusal.
- Economic versus voting rights. Many agreements let heirs inherit distributions while voting control stays with the surviving owners.
- Triggering events. Death, long-term disability, retirement, divorce, bankruptcy of an owner, and loss of a required license.
- Valuation. A formula, an agreed value updated periodically, or an appraisal process with a named method. A stale agreed value is a recurring source of litigation.
- Payment terms. Lump sum, installments, interest rate, and security for the obligation.
- Deadlock and exit. What happens when the surviving owners and the heirs cannot agree.
For a solely owned business, the questions change. Should the business be sold, wound down, or continued by a family member? Who has the relationships that make it worth something? Is there a manager who could keep it running long enough for a sale to happen at a fair price?
Funding a buy-sell agreement
An agreement obligating surviving owners to purchase a deceased owner’s interest is only as good as the money behind it. Where the company or the owners cannot produce the purchase price, the family is left with a promise and the survivors are left with a debt.
Funding approaches generally include life insurance owned by the company under an entity purchase structure, policies owned by the individual owners under a cross-purchase structure, or an installment obligation secured by company assets. Each has different tax and basis consequences, and the choice interacts with how many owners there are. Disability is the more likely event during a working life and is frequently left unfunded entirely.
Insurance-funded agreements need periodic review. Coverage amounts drift out of line as the business grows, and ownership of the policies sometimes does not match what the agreement assumes.
Incapacity: the scenario nobody drafts for
Death is at least a clean event with a legal process attached. Incapacity is ambiguous, and businesses often drift while the family waits to see whether the owner recovers.
Three documents matter here. First, a durable power of attorney with authority that clearly reaches business matters — a general form may not be enough where the agreement requires specific authority or where a bank has its own requirements. Second, the operating agreement, which should say who acts when the manager cannot, and should define incapacity in a workable way rather than leaving it to argument. Third, a health care proxy, so that medical decisions are not entangled with business ones.
Without these, the alternative is a guardianship proceeding, which is public, contested in some families, and slow relative to the pace of a business. Broader incapacity planning is covered on the estate planning page.
Banks have their own rules. Even a valid New York power of attorney can meet resistance at a financial institution that wants its own form, or at a merchant processor that has no procedure for an agent. Confirming in advance what each institution requires is unglamorous and prevents a great deal of trouble.
Key-person risk beyond the owner
Continuity planning is not only about the person whose name is on the door. Consider who holds a professional or trade license the company operates under, who maintains bonding and insurance relationships, who has signature authority at the bank, and who the largest customers actually call.
A written continuity memorandum — kept current, stored where the family and counsel can find it — costs almost nothing. It should list the accountant, the insurance broker, the payroll provider, the bank contacts, the landlord, and where the corporate records live.
- Current operating agreement or shareholders agreement, with all amendments
- Buy-sell agreement and proof that the funding is in force
- Durable power of attorney with authority reaching business matters
- Health care proxy and living will
- Will and any trust, with the business interest addressed consistently
- List of bank accounts, signature authority and merchant accounts
- Leases, key contracts, licenses and permits with renewal dates
- Access instructions for critical systems, held securely
- Names of the accountant, insurance broker and other advisers
Coordinating the business documents with the personal plan
Conflicts between a will and an operating agreement are more common than owners expect. A will leaves the business equally to three children while the operating agreement requires the surviving partner to purchase the interest. A trust is created to hold assets, but the membership interest was never assigned to it. A buy-sell sets a valuation that has no relationship to what the estate will report.
Funding is the recurring failure. If the plan calls for the business interest to be held in a trust, an assignment has to be signed and the company’s records updated. An unfunded trust does not control an interest still titled personally, and families discover this during administration, when fixing it is expensive. That process is described on the probate and estate administration page.
Taxes belong in the same conversation. New York has its own estate tax, and the figures change over time, so current numbers should be confirmed rather than assumed. Where the business is a significant share of a taxable estate, liquidity planning matters — an estate that owes tax but holds an illiquid company can be forced into a sale on bad terms.
Real property held by the business
Many Long Island businesses own or lease the building they operate from, often through a separate entity owned by the same family. That arrangement needs its own review: whether the lease between the entities is written and at a defensible rent, and what happens to the building if the operating business is sold. Title questions are addressed on the real estate law page.
How the review usually goes
The firm typically starts by reading what already exists — the formation documents, any operating or shareholders agreement, the buy-sell, the power of attorney, the will and any trust — and lining them up against each other. Gaps and contradictions tend to be obvious once the documents are side by side. From there the work is prioritized.
Owners often find that the fix is smaller than feared. An amendment naming a successor manager, a properly drafted power of attorney, an updated valuation provision and a signed assignment of the interest to a trust can resolve most of the exposure without restructuring anything.
The Law Offices of Christine Thea Rubinstein & Associates P.C. offers a free and confidential initial phone consultation to review business and estate documents together for owners in Suffolk and Nassau County. Call 1-800-488-6734 or reach the firm through the contact page. Additional background is on the FAQ page and the blog.
Frequently asked questions
I am the only owner of my LLC. Do I really need an operating agreement?
It is worth having, and single-member companies are where the absence hurts most. Without one, there is nothing naming a successor manager or authorizing anyone to act if you are unavailable, and the company can be paralyzed while an estate proceeding runs. It is also the document banks and title companies ask for.
Can my spouse simply take over the business if I die?
Only if the documents allow it. Inheriting an interest is not the same as having authority to manage the company, and some agreements restrict transfers to a spouse entirely. Where the plan is for a spouse to continue the business, the operating agreement, the will or trust, and the bank arrangements all need to say so.
How often should a buy-sell agreement be reviewed?
A periodic review is sensible, and certainly whenever there is an owner change, a significant change in the value of the business, a divorce, a new loan or a change in insurance. Valuation provisions in particular go stale, and a figure agreed to years ago may bear no relationship to the company today.
Does putting my business in a trust protect it from creditors?
A revocable trust does not, because the assets remain within your control. Some irrevocable structures may offer protection, with significant trade-offs and timing rules that have to be considered well in advance. The right answer depends on the goal — probate avoidance, long-term care planning and creditor concerns each point in different directions.
What happens to my business licenses and permits if I die?
It depends on the license. Some are personal to the holder and do not transfer, which can make the business unable to operate until a qualified person is in place. This is worth checking specifically for the trade involved, because it can determine whether a sale is even possible.