If a business owner dies and leaves his business to his brother, what happens if there are customers that still owe the business money?

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If a business owner dies and leaves his business to his brother, what happens if there are customers that still owe the business money?

Are the customers still responsible for pay their debts to the new business owner?

Asked on May 9, 2012 under Business Law, Ohio

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 9 years ago | Contributor

If the business was a corporation or an LLC (limited liability company), the customers would still owe the business; that's because corporations and LLCs are their own legal entities (that's why, for example, Mitt Romney said, "Corporations are people"--he was speaking a legal truth, that legally, a corporation is its own person) and the debt or obligation to the company continues unaffected by whomever owns it.

If the company were a sole proprietorship, the situation is bit more complicated. With a sole proprietorship, the company and the owner are legally one and the same; therefore, a debt to the business was a debt directly to the owner, who has now passed away. Even if the brother inherits the business assets (e.g. name, inventory, assets, etc.), he does not inherit the receivables, since those obligations do not transfer by will or intestate succession.

However, the debts to the owner become debts to his estate. The customers should pay the dead brother's estate, and if they don't, the estate (e.g. through the executor or administrator) can sue to recover the money. Once the estate has the money, it would then be distributed as per the will or intestate succession.


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