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Clause transferring corporate control upon death or incapacitation

Discussion in 'Business & Corporate Matters' started by Fred Roberts, Sep 14, 2017.

  1. Fred Roberts

    Fred Roberts Law Topic Starter New Member

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    Jurisdiction:
    Arizona
    My business partner has an Arizona-based one man S corp that he uses to develop real estate projects. I work closely with him but as an independent contractor, not an employee of the corporation. My partner would like to keep complete control of the corporation while he's alive but should he die or become incapacitated, he would like a clause that would only at that point grant me the authority to have full authority to conduct any of the corporation's business. Does anyone know of such a clause, what type of clause this would be and perhaps point me to some examples of a clause like this? Thank you very much.
     
  2. army judge

    army judge Super Moderator

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    Upon the death of the owner of an "S" corporation, ownership of the owner's shares of stock is determined by the law of the state in which that owner's estate is administered, usually the state in which the owner resided at time of death.

    The principal owner's shares may be transferred according to the terms of a will or by operation of general state inheritance law if there was no will, commonly known as intestate succession.

    The owner's shares can be transferred to individual heirs or trusts established by the owner.

    I suggest you advise your friend to consult with his attorney before he attempts to create a conveyance which might run afoul of the laws of intestacy in Arizona.

    If he desires to transfer the business to you in his will, then he definitely needs (well, he won't need anything, he'll be dead), rather it would serve you that he make his wishes known to an attorney.

    If this is attempted improperly, the estate (including the business) will be subject to challenge in court.

    It might be easier if he made you a partner.

    Again, however, don't attempt that unless an attorney is retained to do so.
     
  3. Fred Roberts

    Fred Roberts Law Topic Starter New Member

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    Thank you for the thoughtful reply. One point of clarification: he doesn't want to "give" the business to me; he just would want me to have control of the business; the projects that the business engages in has various investors and the idea is that I would know how to finish up the development projects we had going at the time of the owner's death and distribute assets accordingly. Does this distinction change anything?
     
  4. army judge

    army judge Super Moderator

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    That would be easy to accomplish.

    I'm not wishing death on your friend, so let's talk about a hypothetical situation, and let me know if it COULD apply to your question..

    Molly owns an S Corp, and Brenda contracts for Molly.
    Molly wants to ensure that if she were to become incapacitated, her clients would be served.
    She asks Brenda would she be willing to finish her projects if she became ill for an extended period of time, or died.
    Brenda says sure, so Molly drafts a list of Brenda's duties, and when those duties would start.

    Both would go to a lawyer, explain to the lawyer what Molly wants done, and the lawyer can discuss options.

    The problem here, as you've presented it, is someone is trying to determine what to do for an event that hasn't transpired.

    Heck, Brenda could predecease Molly, or Molly could die on Tuesday morning, and Brenda could die Tuesday afternoon.

    There is no way the law could provide for such eventualities that haven't occurred.

    Your friend needs to discuss this with a lawyer.

    What will happen to his business after his last client has been served?

    Who will inherit the business?

    Who will pay its bills?

    What you're suggesting won't allow that, because upon his death the S Corp dies, too.

    There are other ways to proceed, so he needs to chat with an attorney that does estate planning, and does wills and trusts.

    I'm guessing a trust of some sore might work, or transition the business to different form of legal enterprise.
     
  5. zddoodah

    zddoodah Active Member

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    So...is he your partner, or is he your employer under an independent contractor arrangement?

    What does "should he die" mean? Obviously, he will die eventually. Also, you mentioned that "he would like a clause," but it's not clear what that means. A clause in what?

    It's not even remotely clear what you're talking about.

    For starters, you referred to the corporation as a "one man S corp." I assume that means your friend is the sole shareholder. Therefore, the first question is what happens to ownership of the shares when your friend dies. Eventually, they should pass to whomever is named in his will or his heirs at law (if he dies without a will). Whoever ultimately inherits ownership of the corporation will have control of (or the right to control) the corporation's operations. The only real way around that would be to vest ownership of the shares in a trust that has very clear instructions regarding this issue.

    Incapacity is different. He doesn't need any "clause" to give you authority to run the business in the event of incapacity. However, again, whoever owns or controls the shares of the corporation will ultimately have the right to decide how the corporation is run.

    If your friend really cares about this, he should consult with a local estate planning attorney -- one who has sufficient savvy regarding the interplay between trusts and business operations.
     
  6. Fred Roberts

    Fred Roberts Law Topic Starter New Member

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    Thanks for addressing my questions. When I mentioned that I was looking for a "clause", I imagined a corporate resolution or something like that that would give me authority to transact the business of the corporation (yes, sole shareholder) after the owner's death. And by death, I really mean premature death. The business works on real estate development projects that tend to last 2 years at most. The idea is that I, after the premature death of the owner, would be authorized to finish up any outstanding project. The business would not really have much value without the owner so it's much less important who would inherit the business.

    Does that help clarify?
     
  7. army judge

    army judge Super Moderator

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    The problem with a S Corp operated by one person is that it dies upon his death.

    S corps are tricky creatures.

    They aren't meant to endure beyond the lifetime of the person to whom they are tied.

    He needs a trust and estate attorney to educate him about his options.
     
  8. Fred Roberts

    Fred Roberts Law Topic Starter New Member

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    Ok, thank you.
     
  9. zddoodah

    zddoodah Active Member

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    I get the concept. It's called continuity planning and it goes hand in hand with estate planning. As I suggested, your friend needs to consult with a local attorney who understands these things.
     

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