What happens to a family-owned business after someone dies varies depending on circumstances. Read on to understand why and what you can do to ensure the right outcome is achieved…
The death of a family member is an upsetting time for anyone, without considering the additional stress of dealing with a will. As emotions are heightened, family members might not be thinking logistically about a situation, for example, who receives the family-owned business. Therefore, mediation for a civil dispute might be necessary to think more pragmatically.
There are different outcomes for different types of business owners, including a sole trader, a partnership, and a limited company. So, it’s important to understand your rights in these situations, as the outcome varies in the case of death or critical illness. It’s also important to consider what the owner wanted to happen to the business.
In this article, we’ll be exploring these situations in more detail. Read on for more…
What Happens if the Business Owner is Sole Trader?
How a business is set up is a key when determining the inheritance position and what happens in the event of death.
If a business is set up as a sole trader, meaning there aren’t any employees or partners, there is no distinction between personal assets and the business. Therefore, they are treated as one for tax purposes. If there is no will in place, the business asset and personal assets will be distributed under the laws of intestacy.
What Happens if the Business is Set Up as a Partnership?
If a business is set up as a partnership, it means it is a separate legal entity, so the terms of the organisation drive the inheritance position. If the owner wants to hand over the business to someone else, it will need to be stated in an up-to-date will, otherwise it would distributed under laws of intestacy.
A Deed of Partnership may also set out what happens to the business in the event of a partner’s death. But partnerships are complex business structures and what happens to shares will be dependent on many factors outside of the Deed of Partnership.
What Happens if the Business is Set Up as a Limited Company?
A limited company will continue after the death of a shareholder, and the shares in the business will pass to the estate of the deceased and will be distributed in terms of their will. A director of a limited company can leave the business to a spouse, but the spouse may want the value of the shares by selling them or to be involved in the business.
What Happens to the Shares of a Business After Someone Dies?
There are multiple arrangements that can determine what happens to the shares of a business after someone passes away, including:
- A prior shareholders’ agreement that the shares may pass to particular people.
- Pre-emption rights in favour of existing shareholders.
- Arrangements to buy out the dead shareholder’s interest.
- A cross-option agreement stating that the remaining shareholders can purchase the deceased shareholder’s shares.
It is important to have these in place beforehand.
What Do ‘Articles of Association’ Mean?
All companies have articles of association which set out how decisions are made by shareholders and directors, and are the first reference point in deciding what happens. Companies can change their articles at any time so you should refer to the articles first to see what they set out.
Is the Age of the Beneficiaries Important?
If beneficiaries are under 18 years old, depending on the will, a trust will be formed to look after anything left to those beneficiaries. Alternatively, it will be given to the guardian in the expectation that it will be used for the benefit of the children. The trust will be overseen by trustees who will then vote on company issues.
Can Other Shareholders Change a Will?
Shareholders cannot prevent another shareholder from leaving their shares to someone else in his will. Any means of control must be done through the articles of association.
Have You Made a Plan for Your Family Business After Someone Dies?
Exit is one of the most important things to consider when planning a business. Therefore, there should already be plans in place for if a business owner or shareholder dies.
You can find templates of shareholders agreements online. Civil disputes might arise when an agreement can’t be reached, so it is important to have legal representation in place.
If you have any top tips for running a business and setting out what happens to a business after someone dies, let us know in the comments below.
Please be advised that this article is for general informational purposes only, and should not be used as a substitute for advice from a trained financial or business professional. Be sure to consult a financial or business professional if you’re seeking advice regarding your family business for when you die. We are not liable for risks or issues associated with using or acting upon the information on this site.