Continuity of Existence in Choosing a Form of Business Organization
Continuity of existence is an important factor in choosing the structure of a business. The value of a business when viewed as a continuing or “going” concern is likely to be considered higher than the same business if it is being dissolved and its value is being distributed.
By definition, a sole proprietorship will end upon the death of the proprietor, and its business will end once the personal representative of the proprietor winds up and closes out the business. The personal representative could sell the assets and goodwill of the business, but the loss of the proprietor is likely to have a significant impact on the value of the business. A purchaser of the business would have to be assured that key employees and business relationships would not be lost if the value of the business as a going concern is to be maintained.
A general partnership ends when a partner dies or withdraws from the partnership. However, the business of the partnership may be continued through a new partnership if there is a provision to that effect in the original general partnership agreement or if the surviving partners agree to form a new partnership that takes into account the interest of the withdrawn or deceased partner.
A limited partnership continues in existence despite the death of a limited partner or the transfer of a limited partner’s interest. However, the limited partnership will end upon the retirement, death, or insanity of the general partner under the Uniform Partnership Act unless the agreement setting up the limited partnership makes arrangements for continuation of the business despite the loss of the general partner. Even with such arrangements, the need for a transition may affect the perception of the going concern value of the business.
The corporation traditionally has been the form of business chosen to take advantage of the value of perpetual existence of the business. A corporation may be dissolved or its charter may be forfeited, but it otherwise may continue in perpetuity, and most jurisdictions require that corporate charters provide for perpetual existence. Unlike with sole proprietorships or general partnerships, changes in the identity of the owners or shareholders of a corporation will not affect the existence of the business and normally will not affect the going concern value of the business.
Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.