Legal Q&A: Preparing for the Worst

• By The WHIR, March 04, 2005

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Legal Q&A: Preparing for the Worst

By David Snead

This story appeared in the March 2005 issue of Web Host Industry Review magazine. Click here to subscribe for free.

March 4, 2005 -- (WEB HOST INDUSTRY REVIEW) -- In this section, Internet lawyer David Snead helps answer some common questions sumitted by Web hosts.

What Happens to my Business if I Die?

The answer to the basic question "what actually happens to my business?" will be governed by the legal entity you've chosen. Without many exceptions, no one should be in business without choosing a business entity. Operating as a sole proprietor creates a great deal of personal risk, and risk for your family. Incorporating or forming an LLC is almost always inexpensive. And most states and localities have taken steps to make it easier for you to file the necessary paperwork. The difficult part is choosing the appropriate entity for you. This choice should be made carefully, as you will have to make trade offs, in terms of taxes, risk isolation and red tape, depending on the entity you choose.

This is an important issue. If you are a sole proprietor, your spouse or children may be fully responsible for your business. If you die, and your spouse doesn't know the difference between the "power" and "reset" buttons on the servers in your basement, the lawyers who represent your customers are going to have plenty of facts upon which to base claims against your estate.

Whether you are doing business as an LLC, a corporation or another entity, the statute of the jurisdiction where your entity is formed will ultimately determine what happens to your business. Assuming you don't have partners or investors, if you haven't provided for the dissolution of your company upon your death, the applicable statute will take care of what happens to your company. But how the statute provides for the dissolution of your company may not be the best for the company, or the way in which you would seek to do it.

If the business organization statute provides for the wind-up of your business, why should you worry any further? After all, you're dead. Online discussions of the subject touched on perhaps the most important issue — passwords. Hosts acknowledged varying levels of preparedness, from a spouse who knows all the passwords to a brother who could "make an educated guess."

How much potential work do you want to create for your brother by your death? If your brother is guessing at your passwords, he will likely be struggling to figure out other, more critical elements of your business. More importantly, what liability have you created for your brother? As he works to figure out your business, he may be creating personal liability for himself by running a business without information crucial to its minute-to-minute operations—information a court would likely say a person running a business reasonably should have, regardless of the circumstance. Customers, and the lawyers writing nasty letters, are not going to accept the excuse that he needs some time since you just died. By not thinking about this issue, you may have created legal liability for your estate and for those who may at one time have been insulated from liability.

Having chosen a business entity, you will have to create a succession plan or, more usefully, a disaster recovery plan incorporating a succession plan. While such a plan may sound sure to mean interminable meetings with your staff and a binder collecting dust on the CEO's shelf, a properly executed and championed plan can be an effective means of making your business run better. A plan of this nature should involve all relevant aspects of your business. It should begin with you, and not with your lawyer or financial advisor.

Think broadly about this plan. Concepts should range from minutia like "where are the passwords kept?" to "does my girlfriend really want to run my company?" Talk to colleagues in your industry. For example, an online discussion yielded an excellent suggestion to seek out "key man insurance." Depending on the type of business entity you've chosen, a bit of key man insurance could significantly lessen the burden on your company should you die, as well as possible litigation based on that event.

You might also want to speak with larger industry players, and build disaster recovery relationships with them. Or you might build a function into the plan in which your accounts are immediately put up for auction, or an investment banker familiar with the industry steps in to broker a sale. Ideas of this type may be effective insulation against liability since they show that you have taken some steps to provide protection for your customers.

Spend a few hours brainstorming these issues, and a few more documenting your conclusions. Once you have a basic draft of what you'd like, then you should call in your lawyer and financial advisor. This will make it more likely that the plan reflects what you want, and not what these advisors think you should have.

Once you've documented the plan, implement it alongside DMCA, privacy and other operational polices you've created. That way, the plan becomes part of your operational culture, and an investment that is actually used — not just another good idea that ends up on the shelf.

This discussion is intended merely as a general summary of the relevant law for background purposes. Legal decisions must be based on your unique situation. Please consult with your attorney before making decisions based on this summary.

Tags:  disaster recovery  Appro  EDS  ETT  Iona  NEC 

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