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It is an unfortunate reality that owners of every UK company will eventually pass away. The impact of a business owner’s death differs depending on the type of business structure left behind. In this article, we will discuss a number of types of businesses and how your passing will impact the business.
Sole Trader
Family members often assume the business will be able to continue running relatively easily after the owner passes away. However, a business run by a sole trader dies at the same time as its owner. The business assets form part of the deceased’s estate and will be dealt with either by a will or rules of intestacy.
As a sole trader, you can leave the business in your will as a gift to family members upon your death. If you are considering this as an option, you should seek specialist legal advice on succession planning.
If a sole trader business owner dies, their business bank accounts will freeze once the bank becomes aware of the sole trader’s death. This can be an issue if there are employees or creditors that require payment. Executors will not usually be able to access these accounts until probate is granted and inheritance tax matters are dealt with.
Limited Company
A limited company has its own legal personality and, therefore, its existence is separate from its shareholders. If you are a company shareholder, whether that be a majority shareholder or minority shareholder, your shares will be transferred in line with inheritance law. Your shares will pass to a personal representative who will act as the executor of your will if you have one.
If you are a director and there are other directors when you pass, they can appoint another director in your place. If, however, you are the sole director, there would be an issue as a private company must have at least one director who is a natural person. In this situation, the remaining shareholders can request the appointment of a new director.
Importantly, if you structure your business as a limited company, it can continue to function after you pass away. Limited companies in the UK have a memorandum and articles of association that include important terms on how the company should function. It is a good idea to include details within the company’s articles of what should happen in the circumstance of your passing, to allow the company to continue to operate as seamlessly as possible.
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Partnership
When forming a partnership, it is also common to draft a partnership agreement. A partnership agreement is a legal document that sets out important terms of the partnership, including what will happen to your share of the business if you pass away. Partnership agreements will take priority over anything mentioned in your will in relation to your share of the business. Therefore, you should draft this with care and with the help of a lawyer.
Within the agreement, you can draft a clause allowing other partners to buy the deceased partner’s shares from the deceased’s estate. This is an efficient method of passing across a share of the partnership to allow the business to continue running efficiently.
If there is no partnership agreement in place, the partnership will automatically end upon the death of a partner. In the same way as sole traders, business bank accounts will freeze. Therefore, it is critical to have a partnership agreement drafted as soon as you decide to enter into a partnership.
Key Takeaways
When someone passes away, it is generally difficult to deal with their affairs. That is why it is essential for business owners to be aware of what happens to their business after they pass. If you own a business as a sole trader or perhaps are a shareholder or partner within a partnership, there are steps you can take to prepare your business for your death.
If you need help or advice around succession planning for any type of business structure, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
In the case of a limited company, the shareholder’s shares will likely pass onto the deceased’s estate. Potentially, a family member will become the new shareholder, depending on the rules of intestacy.
Your shares will pass to your personal representative (an executor). They will then deal with the will or other inheritance rules if a will is not in place.
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