Considering Continuity When Choosing a Business Type

Sole Proprietorship

Following Withdrawal or Death of an Owner Sole Proprietorship. The business entity terminates at the death of the proprietor or if the proprietor becomes unable to manage it.

Partnership

General partnerships and limited liability partnerships under the Revised Uniform Partnership Act (RUPA) (Minnesota Chapter 323A) do NOT automatically cease to exist when a partner dies or otherwise withdraws from a partnership. The partnership continues, unless certain other events occur. A limited partnership does not terminate when a limited partner dies or becomes disabled. The limited partner’s interest may be assigned, and if the limited partner dies, his or her legal representative may exercise all the partner’s rights for purposes of settling the estate.

Corporation

A corporation is a separate legal entity, and therefore the death, disability or withdrawal of an owner has no legal effect on the business entity’s existence. As a practical matter, however, many small businesses depend heavily on the efforts of one or two individuals, and the death or disability of one of those key individuals can seriously impair the economic viability of the business. For this reason, a small business corporation, like a partnership, often will obtain life insurance on key shareholder-employees. The articles of incorporation may provide for share purchase agreements or other restrictions on the transferability of stock in order to retain control of the firm by the remaining key individuals.

Limited Liability Company

For limited liability companies formed before August 1, 1999, the termination of membership of a member by any means is an event of dissolution which generally terminates the existence of the limited liability company. If the articles of organization permit remaining members to give dissolution avoidance consent, or to enter into a business continuation agreement, the limited liability company, or its business, may be continued following an event of dissolution. If at least two members remain following the event of dissolution, and all remaining members unanimously consent within 90 days of the termination of membership, the limited liability company’s existence and business can be continued. (The articles of organization may provide for less-than-unanimous consent to continue the limited liability company.) Even if the limited liability company’s existence is terminated, if the articles of organization permit it, the remaining members may continue the business by merging the limited liability company into another Minnesota limited liability company or into a Minnesota or foreign corporation. For limited liability companies formed on or after August 1, 1999, the termination of membership of a particular member is an event of dissolution only to the extent specified in the articles of organization or in a member control agreement, or if the membership of the last member terminates and no new members are admitted within 180 days of that termination. Otherwise, the termination of a member’s interest does not affect the existence of the limited liability company.


CREDITS: This is an excerpt from A Guide to Starting a Business in Minnesota, provided by the Minnesota Department of Employment and Economic Development, Small Business Assistance Office, Twenty-eighth Edition, January 2010, written by Charles A. Schaffer, Madeline Harris, and Mark Simmer. Copies are available without charge from the Minnesota Department of Employment and Economic Development, Small Business Assistance Office.

This is also part of a series of articles on How to Pick the Right Business Entity Type. These articles help you select the right business type for your circumstances.