Summary
- The impact of a business owner’s death depends on the business structure: a sole trader business ceases to exist on the owner’s death, a partnership without a partnership agreement automatically dissolves, and a limited company can continue operating as it has its own legal personality.
- For sole traders and partnerships, business bank accounts will freeze upon the owner’s death, which can cause significant cash flow problems for employees and creditors until probate is granted.
- A limited company’s articles of association, and a partnership’s partnership agreement, should set out what happens on an owner’s death, including share valuation, transfer procedures, and director appointments.
- This article explains what happens to different types of UK business structures when an owner passes away, and how business owners can plan ahead to protect continuity.
- LegalVision, a commercial law firm specialising in advising clients on business succession and structuring matters, outlines the key considerations for sole traders, limited companies, and partnerships.
Tips for Businesses
Review your business structure now and consider what would happen if you passed away unexpectedly. Sole traders should seek succession planning advice. Partnerships should have a written partnership agreement in place from the outset. Limited companies should update their articles of association to include share transfer procedures, valuation mechanisms, and director appointment provisions.
Business succession planning is the process of preparing for what happens to a company when its owner dies, and the outcome differs significantly depending on whether the business operates as a sole trader, a limited company, or a partnership under UK law. A sole trader business ends at the same time as its owner, with assets passing through the estate, while a limited company can continue operating if its articles of association address director succession and share transfer. Partnerships depend entirely on whether a partnership agreement is in place. In this article, we will discuss a number of types of businesses and how your passing will impact the business.
This factsheet outlines the key features and the pros and cons of four common US business
structures: sole traders, partnerships, limited liability companies (LLCs), and corporations.
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.
It is important to note that while you can leave business assets to beneficiaries, they cannot simply continue trading under the same business name and structure. They would need to:
- establish their own sole trader business; or
- incorporate a limited company or alternative structure.
If a sole trader business owner dies, their business bank accounts will freeze once the bank becomes aware of the death. Executors will not usually be able to access these accounts until probate is granted and inheritance tax matters are dealt with. This can create immediate problems:
- cash flow can be severely disrupted for several months;
- employees may face a delay in receiving wages; and
- creditors and suppliers may not receive payment on time, damaging business relationships and reputation.
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. It is a good idea to include provisions within the company’s articles of association covering what should happen upon your death. These might include:
- procedures for appointing replacement directors;
- pre-emption rights for existing shareholders; and
- valuation mechanisms for shares.
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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 include a buy-out clause allowing other partners to purchase the deceased partner’s share from the estate. These clauses often include:
- predetermined valuation methods for the share;
- agreed payment terms; and
- provisions to prevent disputes between surviving partners and the deceased’s estate.
If there is no partnership agreement in place, the partnership will automatically end upon the death of a partner and business bank accounts will freeze, in the same way as a sole trader. It is critical to have a partnership agreement in place as soon as you decide to enter into a partnership.
Comparison: What Happens to Your Business When You Die?
| Sole Trader | Limited Company | Partnership | |
|---|---|---|---|
| Does the business survive? | No. It ends with the owner | Yes. Separate legal entity | Depends on the partnership agreement |
| What happens to assets/shares? | Form part of the estate, dealt with by will or intestacy | Shares transfer via inheritance law to a personal representative | Dealt with per the partnership agreement, or by intestacy if none exists |
| Do bank accounts freeze? | Yes | No | Yes, if no agreement is in place |
| Can the business continue trading? | Not under the same structure | Yes, with director appointment procedures in place | Only if the agreement provides for it |
| Key document to have | Will and succession plan | Articles of association with succession provisions | Partnership agreement with buy-out clause |
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, LegalVision provides ongoing legal support for businesses through our fixed-fee legal membership. Our experienced business lawyers help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 0808 196 8584 or visit our membership page.
Frequently Asked Questions
What happens to a limited company after an owner passes away?
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.
What happens to my company shares after I die?
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.
Can I prevent my business from being disrupted if I die unexpectedly?
Yes, through proper succession planning. This includes having appropriate legal documentation (shareholder or partnership agreements and updated articles of association), identified successors, and clear procedures for business continuity. The specific measures depend on your business structure and circumstances.
Should I take out life insurance as part of my succession planning?
Yes. Surviving partners or shareholders often use life insurance policies, sometimes called ‘keyman’ or ‘partnership protection’ policies, to fund a buyout of a deceased partner’s share without putting financial strain on the business. Speak to a financial adviser and a lawyer to make sure any policy aligns with your partnership or shareholders’ agreement.
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