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If you are a business owner, what will happen to your business – and your financial interest in it – should you die?
BLB Private Client specialist, Jenny Greenland, said: “If you have made no plans for what should happen in this scenario, you are not alone. It’s not something we like to think about, but it really is very important to plan for the worst. The chances are that other people are also financially reliant on your business, whether it’s your loved ones, co-owners, employees, or their families.”
Legally, the default position on your death will depend on the structure of the business.
Sole traders
If you are a sole trader, you are the business, and it dies with you. As your business and personal finances are one and the same, everything falls into your estate to be dealt with under the terms of your Will, or under the intestacy rules if you have not made a Will.
Your business assets may need to be sold to clear business debts or outstanding obligations such as loans, unsettled invoices, and employee wages. And if there are insufficient assets in your business to cover those liabilities, depending upon the circumstances, they may have to be met from the rest (non-business part) of your estate.
Partnerships
In many business partnerships, there’s no formal partnership agreement in place, or if there is, it may not deal with what will happen if a partner dies. In that situation, the partnership is automatically dissolved, which can cause enormous difficulties for all concerned.
A written partnership agreement should provide for what happens next to ensure the continuance and future management of the business. This may include (but will not be limited to):
- buy out provisions for surviving partners.
- the delegation of decision-making to successors.
- considering the best interests of both the business and the deceased partner’s family/dependents.
Limited companies
Unlike a sole trader or a partnership, a limited company and its owner(s) are separate legal entities. So, for example, the company itself is responsible for its debts and liabilities in the event of an owner’s death, unless they gave personal guarantees for those liabilities.
The deceased owner’s shares in the company can be sold or transferred under the terms of their Will, or the intestacy rules if they have not made a Will.
Planning for the worst
Succession planning is crucial for any business owner, particularly if you are a co-owner. Should the worst happen, ensuring the smoothest possible succession is in the best interests of both your co-owner(s) and your family/dependants.
Clarity is key, and the most important step you can take is to review and update business documentation to ensure that all concerned understand and agree on what will happen should one of you die.
Consideration should also be given to taking out life insurance. Specific products are available which are tailored to protect the interests of surviving business partners or shareholders. And life insurance for the benefit of your family/dependants can help cushion the immediate financial blow, particularly if it’s likely to take some time to sort out business succession.