Most people see a gap in the market or have a killer idea and excitedly start planning their future business and dreaming of its success. One thing that most business owners do not consider is what actually happens to their business if they die.
While it isn’t exactly something we usually think about daily, it certainly is worth considering and noting down when defining your exit strategy. The ideal option is to sell your hugely profitable business and retire on the proceeds and live the high life, but the reality is that end game fantasy doesn’t come true for all of us.
*** DISCLAIMER - GENERAL ADVICE WARNING ***
The outcome for your business will depend a lot on its structure, and any kind of succession planning should be discussed thoroughly with your lawyer and accountant prior to writing your will.
Sole Traders
If your business is currently operating under a sole trader structure, your business will typically cease upon your death (or bankruptcy). Perpetual succession is not applicable to sole traders, and while you are able to bequeath your business in your will, there is no guarantee that the gift recipient will or is willing to be bound to continue operating your business. Additionally, as sole traders are personally responsible for any debts or liabilties, there is also the question of what happens to any debts incurred as a result of operating the business prior to death.
Partnerships
If your business operates under a partnership structure, you and your partner (s) should have a partnership agreement in place which would outline the details of the next step in the event of death, bankruptcy or permanent disability of a partner. Partnership agreements would usually contain a clause outlining various options, such as:
The deceased’s estate could take over their share of the business;
The deceased’s share transfers to you on a payment to their estate;
An heir takes over the deceased’s share;
An option to purchase the deceased’s share using a specific financial formula, or;
The business is liquidated and the deceased’s share distributed to their estate.
If your business operates as a partnership without a partnership agreement, then you will need to default to the relevant Partnership Act in your state in the event of a partner’s death. In general, the partnership will be dissolved in the event of the death or bankruptcy of a partner and the remaining partner owes the deceased’s estate a share of the partnership as at the date of their death.
Company
If you operate your business as a company with you as the sole director and shareholder, the executor of your estate will be able to appoint a new director to your company who keeps the company running until shares are distributed to your beneficiaries, who are then able to nominate a new director if they wish.
This, of course, assumes that you have a will. If you do not have a valid will at the time of your death, a family member or other near person will need to apply to the Supreme Court for letters of administration to be able to control your estate - a process that could take months. During this time, there will be no director and your business may not be able to operate, which in turn, has a flow on effect on the reputation and value of the company to the beneficiaries of your estate. At this point, even seilling your business would not be an easy option because there would be no owner who can transfer ownership or shares until a testator has been appointed. If the decision has been made to sell, the absence of a will creates a significant time delay which could then ultimately lessen the sale value of your business.
If you operate your business with more than one director and shareholder, the surviving directors can continue to manage the company and perhaps even make a temporary appointment in your absence, pending a permanent appointment of the shareholders of the company.
If you operate your business with more than one director but with you as the sole shareholder and you were to pass away, the remaining directors can continue to manage the company until the beneficiaries have had the shares transferred to them and a new appointment is made.
Next Steps
If you haven’t considered succession planning as yet, now is a good time to look at your options and obtain professional and personalised advice for your situation. Starting a business and building it for success takes dedication and hard work so it is important that all aspects are covered as well as common eventualities.