This is the tenth and final article in my series exploring legal mistakes that can be fatal to a business (even a seemingly well-established one). The illustrations and guidance provided are designed to help you spot these mistakes early. Each of these mistakes is preventable with proper planning and preparation.

To review, this 10-part series covered:

1. Failing to set up a proper business entity
2. Failing to maintain corporate formalities
3. Failing to segregate business funds and enterprises
4. Failing to use a registered agent
5. Failing to protect business IP
6. Failing to follow prudent employment practices
7. Failing to implement restrictive covenants with employees and contractors
8. Failing to establish a buy-sell arrangement
9. Failing to fund the buy-sell arrangement
10. Failing to create (and update) an estate plan

Last month, I discussed the dangers of failing to fund a buy-sell arrangement. As you may recall, buy-sell agreement or provision typically addresses terms on which one owner can sell her interest to the other owners, setting forth the methods of calculating the purchase price and of establishing the terms of sale. When drafting a buy-sell agreement, it’s important to detail the process both for establishing the value of the outgoing owner’s shares and how the shares will be paid for.

So, you’ve taken the steps outlined in my prior articles and your business is well on its way to running along smoothly. As your business becomes more valuable, you’ll also want to ensure that you have properly taken care of your loved ones in the event of your death. While not a business-specific mistake, failing to set up an estate plan – especially if combined with some of the other mistakes addressed in this series – can severely impact your co-owners and your next-of-kin. This article will discuss how to avoid the devastating consequences of failing to establish an estate plan.

Read on for an illustration of how easily mistakes can arise, how fatal they can be for even the most successful business, and how to avoid them entirely with dedicated planning.

As a wedding gift, a friend gave Tony and his wife Joyce a session with an estate planning attorney. They put it off for several years – who wants to think about death? – but finally decided to create an estate plan after Joyce had a minor cancer scare. They didn’t have much in the way of assets at the time (or children), so Tony named Joyce as his sole heir, and she returned the favor. The estate plan was silent as to any eventuality of divorce.

When Tony left his manufacturing job a few years later to start his marketing business, Joyce was supportive at first, but the excitement waned as she saw how much of a time sink the business became for Tony. As a university professor, Joyce had summers off and she missed all the summer travel she and Tony used to do. She was happy for Tony and his business, but the relationship was definitely suffering.

Tony and Joyce had always argued, but wasn’t that true of all couples? Still, Tony was taken back when Joyce stormed out of the home two years later after one of their spats and did not return. A few days later, a man came to Tony’s door home and served him with divorce papers.

The divorce was long and bitter. Fortunately, they did not have any children, so they were not fighting over custody and visitation, but the property settlement was difficult. Eventually, Tony traded his interest in their home and in Joyce’s retirement benefits so that he could keep his business.

Tony poured all of his free time into the business and was heavily rewarded as it continued to grow. Tony had no plans for marrying again, but changed his mind when he met Michelle. They immediately fell in love, and, a few months later, were married. Michelle had founded her own business some years back and understood the demands on Tony’s time. They never argued and Tony had never been happier.

With Michelle’s support, the business grew as never before. Over the next eight years, three children joined their family.

Shortly after their 10th anniversary, Tony was killed in an accident. Family and friends rallied to support Michelle and the children. Even Joyce attended the funeral and expressed her condolences.

A few weeks after the funeral, before Michelle had even begun to consider next steps, Joyce’s attorney sent Michelle a letter asserting that since Tony had never updated his estate plan, Joyce was his sole heir.

As the old saying goes, nothing is certain in life but death and taxes. And if you don’t have an appropriate estate plan, your heirs will pay unnecessary taxes (and potentially unnecessary legal fees) when you die. Further, your heirs may be forced to sell your business if you have not coordinated your estate plan with your buy-sell agreement.
If you own a business, you must have an estate plan that is tailored to meet your specific needs. Whether you have a spouse and children, are divorced, or are single, an estate plan can spell out how your business continues after your death and how your heirs can continue (or liquidate) what you’ve built.

In the example above, while Joyce might not actually end up owning Tony’s business, Michelle and her children will no doubt incur legal fees in defending against Joyce’s attempts. The lack of an updated estate plan not only leaves the business in limbo, but also leaves Michelle in a legal battle amidst her grief from losing Tony.

It is important to consider an estate plan in line with your business succession planning and your buy-sell agreement. Who will maintain your business should you pass away? Do you have other owners who will buy the shares from your estate? Do you want a close friend or family member to inherit your sole proprietorship and keep the business going?

It’s also important to regularly review and update your estate plan to make sure it is still applicable as you experience life changes. Marriage, divorce, death of a spouse, the birth of children, and the addition of business partners are all events that should trigger a review and update of your estate plan. If you don’t, your business (and your estate) may not end up where you want it to go.

Knowing the 10 Fatal Mistakes outlined in this article series is not enough. Successful businesses take affirmative steps to avoid and overcome these mistakes. Will you choose to heed the warnings?

If any of the illustrations remind you of your own business, take action today to make sure you won’t succumb to the 10 Fatal Mistakes. Contact your lawyer and develop and implement a plan for addressing the 10 Fatal Mistakes. Follow that plan through conclusion.

Running a successful business is hard work in any economic environment. Avoid the these mistakes and help your business succeed. Good luck!

Erik G. Moskowitz specializes in civil trial law, including employment law, business law, and commercial litigation. He is well versed in corporate governance issues and assists and advises C-suite executives and managing directors on all manner of internal corporate policy. Moskowitz is also skilled at advising founders at start-up stage and positioning new businesses for growth while ensuring they’re insulated from risk. This article series was adapted from an e-book by Scott Gibson, Arizona, 2009.