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When a sole trader passes away, it is a difficult time for those close to that person and those involved in the business. There are important questions to ask, such as:
- What happens to the day-to-day running of the business?
- What happens to any employees?
In this article, we will discuss the overall structure of a sole trader business and the impact of passing away on your business.
What is a Sole Trader Business?
A sole trader business is one where the business owner is self-employed. They have complete control over the overall running of the business, profit, tax and day-to-day business considerations.
A key aspect of this type of business is that a sole trader does not have an individual identity to their business. You will be treated as one legal entity if you are a sole trader. Therefore, your business assets will be considered part of your personal assets upon death. This contrasts with a limited company, where the owners and company are separate from one another. When it comes to liability, such as business debt, company owners have more protection over their personal assets.
Consequently, upon the death of a sole trader, the business ceases trading and effectively dies with them. This can have devastating consequences, particularly if there are employees within the business. It is often assumed, particularly with family businesses, that other family members can take over the business. However, this is not correct. Upon the death of the sole trader, all business accounts will be frozen until probate is granted. This can have detrimental impacts on money pending being paid out of the accounts, such as business expenses and wages. If employees have been working with the business for at least two years, they will be entitled to claim redundancy from the deceased estate.
How to Ensure the Sole Trader Business Continues?
If there is a will in place, the executor may be able to control and run the business. However, it is much more advisable to put in place arrangements to avoid this. To guarantee your sole trader business can continue following your death, you should consider what is termed ‘succession planning.’ Put simply, this is the process of deciding what will happen when the sole trader passes away. Consider restructuring your business to ensure someone is available to continue operations if you pass away or fall seriously ill.
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Contrasting Sole Traders with Partnerships
Partnerships can take two forms – general partnerships and limited liability partnerships. In contrast to sole trader businesses, both of these types of partnerships will usually have a partnership agreement drafted, which details the full terms and conditions of the arrangement. This will normally include the impact of one partner’s death on the partnership. Crucially, the business will be able to continue functioning, as there will be a remaining partner to control this.
Partnerships can therefore be a more secure method of structuring a business regarding events such as serious illness or death. However, it is critical to have a partnership agreement in place to account for this type of situation and stipulate the terms of the division of profit.
If there is no partnership agreement, the business must cease trading, and the partnership will automatically dissolve upon one partner passing away. As such, drafting a partnership agreement is crucial to a business’ continued operations in these circumstances.
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Key Takeaways
Sole trader businesses and their self-employed owners are recognised as one legal entity. Therefore, when the sole trader passes away, the business will cease trading at the same time. This can have a huge impact if there are creditors or employees to be paid. If there is a will, the executor can potentially manage this. Still, it is a difficult situation and depends on the individual business and will. If you are a sole trader, it is important to plan for this situation. Consider whether restructuring your business into a limited company or partnership may be more advantageous. In these types of business structures, the owners and company are separate entities, meaning the business can continue to survive without the owner.
If you need help or advice around restructuring your business, 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
A sole trader business is one where the business owner is self-employed and has complete control over the overall running of the business. This person is responsible for any profit, tax or day-to-day business considerations.
Upon the death of a sole trader, the business ceases trading and effectively dies with them. If there is a will in place, the executor may be able to control and run the business. However, it is much more advisable to put in place arrangements to avoid this.
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