What happens to a small corporation if one of the shareholders dies?
A shareholder’s stock in a small corporation is considered personal property of the shareholder. If the shareholder dies, his personal property passes to his heirs by way of a will, trust, or other method according to the state law where the shareholder lived when he passed away. The problem is that the remaining shareholders in the small corporation may not want to be involved with the deceased shareholders relative’s in running the business.
That’s where a properly drafted Buy-Sell Agreement or Shareholder’s Agreement can help. These agreements can require that in the event of death, the shares of a deceased shareholder will be purchased by the corporation itself or by the remaining shareholders. The agreements usually set out a procedure for the buy out and a method for valuing the shares of the deceased shareholder. In this way, the deceased shareholder’s heirs get paid for the stock but are not involved in the ongoing operation of the corporation.
Author: Robert Montgomery
Attorney Robert Montgomery has been counseling and incorporating businesses for more than 20 years. During that time, he's helped set up more than a 1000 corporations and limited liability companies (LLC's). He's a business owner himself and has been corporate legal counsel for numerous small business corporations. He's presented lectures and seminars on the benefits and procedures involved with incorporating or forming LLC's and how to operate them for maximum benefit. View all posts by Robert Montgomery
