If I die will it kill my business?

If I die will it kill my business?

Inheritance Planning For Your Business – It’s Time

Running your business effectively involves utilising a multitude of skills, plus business planning and your sound judgement. This allows you to operate your business successfully and move towards achieving your business goals. But that is not or should not be the end of your consideration of running a business.

A time should come when you ask yourself this important question “If I died tomorrow what would become of my business ”? Do you know the answer? For many it could mean the end of the business and a raft of problems for those left behind.

Sole Traders

Sole traders are typically the key person in the business with the skills, knowledge, and experience that cannot easily be replaced. First of all you must consider if the business without you as the owner has any value in terms of physical assets and business ‘goodwill’ that might allow the business to be sold as a going concern. If this is not the case the only sensible option is that the business is wound up and any monies realised from this will form part of your estate.

Other possibilities might be feasible e.g. a suitable employee could be ‘groomed’ to purchase the business on agreed terms. This could include a period of grace to allow this employee to raise the capital needed for the buy-out and in the meantime they could pay a proportion of the profits to your family or surviving spouse. Your Will can be suitably drafted to achieve your wishes. This can if necessary include granting special powers to your Trustees to accomplish your this.
You should look at any binding legal contracts and leases and within the business, and check the provisions that apply in the ‘event of your death’. Look for penalties and restrictions concerning rights to assign.

Partnerships

Without a Partnership Agreement in place the death of a business partner actually dissolves the Partnership and the firm is then wound up. The applicable proportion of the capital and income then passes into the estate of the deceased business partner.

Consider the possibility that at the time of death there could be more liabilities than capital which would leave the estate potentially liable for debts of the now wound up partnership. This is because of the legal position that a partner is jointly and severally liable for the firm’s debts. So if death occurs at a ‘bad time’ when partnership liabilities are more than the capital in the firm there may nothing to leave. Also outstanding debts might end up being payable from your estate as the liability is against the individual partners and not the no longer existing Firm. This liability extends to your estate after your death.

If surviving partners wanted to keep the partnership in ‘some form’ a speedy payment to the your estate for value of your assets may be able to divert the selling off procedure.

Best advice is to have a Partnership Agreement and a special Cross-Option Agreement in place for all the partners. Properly done a Cross-Option (or Double-Option) Agreement allows surviving business Partners to buy the deceased business Partners’ share which is paid for from Life Insurance arranged as a component of the agreement. It is also a useful shield from Inheritance Tax if set-up properly.This arrangement can also prevent an unsuitable person getting involved in the business simply because s/he has inherited the deceased Partner’s share of the business.

With both a Partnership Agreement and a Cross-Option Agreement in place you can be sure that your family and your surviving business Partners will benefit from a considered and properly planned settlement of your business affairs. All of this will equally apply to you if one of your business Partners was the one to die. The fact is you would all be protecting each other.

One alternative to a Cross-Option Agreement is to set up a Business Trust in a Will. This would enable suitable Trustees (e.g. your accountant) to run the business on behalf of the beneficiary, who might be to young to do it at the time. If this approach is preferred it makes sense for all the partners to have similar provisions when appropriate. After all it is about protecting the business to benefit all concerned.

We all know that having an up to date and valid Will is important to regulate your personal affairs, but it can also be useful to help in your business as well. Cover all the options to get the best result if the worst happens.

A Shareholder in a Limited Company.

A Limited Liability Company has a separate legal identity distinct from the shareholders who actually own it. The Articles of Association of the Company set out the rights of Shareholders. The Articles can determine the rights a shareholder has to dispose of his shares. Frequently it is a requirement that other shareholders can exercise an option to purchase the shares of a deceased shareholder. Alternatively, there may be a right to leave shares to specified family members e.g. Spouse and children. The point is that by ensuring the Articles of Association are suitably drafted you can achieve the desired succession arrangements in your Will.

The importance of the distribution of the shares after death is clearly more important if it involves major shareholders. In theses circumstances using a Cross-Option Agreement would be a better way to achieve business continuity. This would allow other major shareholders to buy the deceased shareholders’ share paid for by Life Insurance arranged as part of the agreement. And remember it can be a useful shield from Inheritance Tax if put in place properly.

This is a good way of avoiding the ‘stranger in the boardroom’ problem that could occur without the requisite agreements in place which in itself could de-stabilise or even ruin the business.
As with partnerships you could set up a Business Trust in your Will. Again suitable Trustees can be appointed to take a role in the business on behalf of the beneficiary, if this is desirable. So again inheritance planning can take into account both your personal and business considerations in your Will and through the use of other types of business agreement.

Plan properly or risk failing your business partners and family?

If you have a business that can continue after you die you really should get the right ‘tools’ in place to allow it to do so. Without adequate planning and a well drafted Will the business may not survive after your death even it it was possible. If this happens it would add an extra burden to others in your business and your family in what would surely be a difficult enough time.