Estate Planning for a Family Business assumes the company can survive the transfer. Four tests that decide whether it can, and what to do when the honest answer is no.
The documents are written on top of an assumption nobody tested: that the business is an asset a person can inherit.
Succession work begins after that question has been settled, and it is settled by default: the company continues, and the plan decides who gets it. When that is wrong, the buy-sell agreement, the voting and nonvoting split and the funded buyout are scaffolding around something that will not stand on its own.
Four tests are worth running before any of it is drafted. Any one of them can come back no.
Does the business exist without the owner? Some companies are an enterprise: transferable contracts, a workforce, repeatable systems, customers who buy from the company. Others are one person, an assistant, and a phone that rings because of who answers it. The United States Tax Court drew that line in Martin Ice Cream Co. v. Commissioner, 110 T.C. 189 (1998), holding that a shareholder's personal relationships and reputation were his own assets rather than the corporation's, because he had never signed an employment agreement or a covenant not to compete with the company. The case is about tax. The practical reading is harder: value belonging personally to the owner does not travel with the stock. The child inherits the lease, the payroll, the equipment note and the personal guarantee, and does not inherit the reason the phone rang.
May the person you have in mind legally hold it? For a California professional corporation the answer is often no. Corporations Code section 13407 requires that shares held by a deceased shareholder be sold or transferred to the corporation or to a licensed person within six months following the date of death, and within 90 days after a shareholder becomes disqualified. Section 13401.5 lets certain other licensed professionals hold shares, subject to limits, and an unlicensed spouse or child is not among them. For a medical, dental, legal, accounting or engineering practice, leaving the shares to the family in a trust is not a plan the statute will carry out.
Does the license survive? A contractor's license is the clearest case, because a sole owner's license is cancelled at death while the work in progress carries on. Business and Professions Code section 7076 lets an immediate family member request a continuance to finish projects in progress and take on new work for a reasonable time set by board rule, and the Contractors State License Board's guidance says the request should reach it within 90 days of the death. That is a runway to finish, requalify or sell. It is not an inheritance. Where the license depends on a qualifying individual, section 7068.2 gives 90 days to replace that person before the license is automatically suspended or the classification removed.
Can the successor keep the people? Largely not by contract. Business and Professions Code section 16600 voids agreements restraining someone from engaging in a lawful profession, trade or business, and sections 16600.5 and 16600.1, both operative in 2024, widened that unenforceability and added an employer notice duty. What works instead is compensation, real equity, and telling those people about the transition before they hear it elsewhere. Note the exception: section 16601 permits a covenant not to compete in connection with the sale of the goodwill of a business or of an entire ownership interest. California will enforce that restraint for a buyer and will not enforce it for an heir.
When a test comes back no, a sale is a plan rather than a failure, and it is a better one while the owner is alive. A living owner can be present for the transition a buyer will insist on, and can give the covenant section 16601 allows, which is often a material part of the price. An executor can do neither. The estate plan then gets simpler: the illiquid asset is already cash, the fairness question stops being an argument about control, and deferral under Internal Revenue Code section 6166, which exists because a closely held business cannot be liquidated on a nine month schedule, stops being something the plan depends on.
A deliberate wind-down is also a plan: finish the contracts, collect the receivables, sell the equipment, close the entity, and send the proceeds through the trust like any other asset. So is keeping the company under hired management, provided the family member who will supervise that manager is named while the owner is alive.
None of this is an argument against Estate Planning for a Family Business. It is an argument for asking first, and out loud, whether there will be a business the day after. A plan built on an untested yes hands obligations to somebody who was expecting an asset.
General information about California and federal law, not legal advice, and no attorney-client relationship is created. How they apply depends on your entity type, your license and your own documents.
Bring the ownership documents and the license. We will tell you which test comes back no.
