What happens to a business when an owner dies?
SPONSORED CONTENT - by Harper Macleod
Leigh Beirne, a Senior Associate in our Private Client team, and Bernadette Rutherford, a Senior Solicitor in our Corporate team, consider measures business owners need to put in place when planning for the future.
The pandemic has forced many of us to think about our mortality and steps we should take to put our affairs in order. For some people, that may involve making a simple Will. For business owners, however, additional and early estate planning will be essential to ensure the business can continue to trade in the event of their death. Three important questions for business owners to consider are:
1. What would happen to the business on your death?
This will largely depend on the structure of the business, but it’s also important to consider financial implications, your goals and intentions for the business and family dynamics. As a start, having an appropriate Will in place will control who will be in charge of your estate administration and who will inherit your business. The Will must coincide with appropriate business documentation, which should stipulate what is to happen to your interest/shares on your death. Below are key considerations for different business structures:
Sole trader: Such a business will cease to exist on the sole trader’s death, causing a headache for those wishing to continue trading, not to mention considerable time and expense working out the most efficient way to do so. While there is not a ‘one size fits all’ solution, a sole trader should consider setting up a partnership or a limited company into which the business and assets are transferred, to allow the business to continue trading with minimal disruption.
Partnership: If there is no partnership agreement containing provisions on death, The Partnership Act 1890 will apply, under which the partnership is dissolved. Unless the surviving partners agree to continue trading using the deceased’s capital or assets (which can become problematic), the surviving partner(s) must wind up the business and deal with the deceased’s partnership share. This can be complex and time-consuming.
Such situations can be avoided by having a partnership agreement documenting answers to questions, including: Who will take over the deceased’s interest? How should the deceased’s interest be calculated and paid out? How should heritable property be dealt with?
Limited company: A company must have articles of association setting out its governing rules. Time should be spent preparing a bespoke set of articles which include provisions on death of a shareholder or a director. There is a common misconception that a shareholder’s shares will automatically pass in accordance with his Will. However, a Will is subject to a company’s articles, which may contain restrictions on the transfer/transmission of shares. Shareholders should, therefore, ensure the articles contain adequate provisions to enable shares to pass in accordance with their Will.
2. Can family and business interests be balanced fairly?
The more difficult element to this type of planning is often balancing the interests of different family members. There may be one relation who is more involved in the business, and who is the obvious successor, but how will your other family members feel and will they be provided for in other ways?
3. What financial implications should I be aware of?
If you have sufficient other assets and income, it may be beneficial to start the process of passing the business to the successor while you are still involved and able to provide direction and guidance. It is also important to consider tax implications. For example, Inheritance Tax planning is essential when considering the future of a business, to preserve valuable allowances such as Business Property Relief.
There are many factors to consider when planning for the future of your business, and our dedicated team can provide bespoke advice to help protect your loved ones and to ultimately ensure the survival and success of your business.
leigh.beirne@harpermacleod.co.uk
bernadette.rutherford@harpermacleod.co.uk